Watching Lombok rescued through a pre-pack has been bittersweet for Alex Cresswell-Turner. The furniture firm he built may have gone bust, but at least his brand is alive, jobs are saved and the Web offers a way ahead

Shell-shocked survivors emerging from the wreckage of a train crash often can't help grinning. Unable to register what's happened to them, they focus on the relief of survival. It's an image that strikes me as Alex Cresswell-Turner, founder, former chief executive and now creative director of furniture retailer Lombok greets me in a scruffy corridor. He is grinning as he ushers me into his surprisingly badly decorated office. Whatever else you can say about the way he runs his business, Cresswell-Turner doesn't nab the best furniture for himself.

The interview takes place just six days after a consortium, including the old management team, has bought the firm out of pre-packaged administration, or "pre-pack". "It all happened on Wednesday evening last week and we are still getting back on our feet," he says as we settle into a couple of sofas that have seen better days. "It is starting a new company. Everything gets ripped up and started again. When you realise the knock-on impact, I think it will be weeks before a sense of normality returns."

Getting things back to "normal" won't mean business as usual. This much becomes clear as Cresswell-Turner talks about the past 18 months, during which he has seen a thriving, growing company fall apart, leaving a bunch of investors out of pocket and his own stake in the business reduced to virtually nothing.

Lombok's story is the perfect exemplar for recent times. Cresswell-Turner had the idea for the business while working as a stockbroker in Jakarta in the late 1990s. Visitors would rave about his dark Indonesian wood furniture. When a currency crisis sparked riots, he decided it was time to leave. Rather than return to work in the City, Cresswell-Turner sought out an old university friend and began to import and sell that furniture and other accessories, initially from an old garage in Parsons Green, south-west London. If the idea was good, his timing was immaculate.

As the housing market boomed, so did the business. The garage became a shop on the King's Road, followed by more shops in the smartest areas of London and eventually across the country. As houses were developed, bought and sold at an increasing rate, so the market for fancy furniture took off. Having made a profit in its first year, the company remained profitable until last year.

But just as its success was rooted in the credit-fuelled housing frenzy, so the cracks appeared when boom turned to bust. Property deals fell dramatically in early 2008, and as people stopped moving
furniture sales slumped. "For most retailers, March 2008 was nasty. We saw furniture sales drop like-for-like 33 per cent. Our first reaction was horror. We hoped it was a one-off. Then the second month we had a creeping realisation this might be a trend. By month three we needed an action plan and went through a round of redundancies."

Lesson number one, he says, is to take the pain early. "When you do your first cut, make sure it is deep, painful and sharp. Ours was not. We lost 12 employees out of 185."

Things got worse when the firm's merchant card provider (which guarantees to repay customers' money should an order go wrong) demanded £800,000. It was money Lombok didn't have. A deal was agreed where £400,000 was covered from existing facilities, but it put the management on edge.

"We could no longer rely on the bank," says Cresswell-Turner. "For the first time the banks were feeling wobbled. Barclays had been fantastic up until then. But when you are not sure whether the bank might pull your overdraft facility, it's as bad as not having it. You can't plan cashflow forecasts that show you will need it."

Lombok's management turned to shareholders to seek a cash buffer. So the shareholders-investment club Pi Capital, which had invested £2.25m in 2005 for 47 per cent of the business—tried and failed to raise £1m through a rights issue. It secured £250,000, but needed at least £500,000 for the issue to go ahead. Cresswell-Turner is reluctant to place the blame on someone else for not supporting Lombok—even the most obvious candidates.

He says the banks "acted sensibly and did what you would expect them to", while Pi Capital's member-investors were "understandably feeling reserved about making investments". His disappointment seems to be aimed at Pi's model: "If the shareholder had been a wealthy individual or a fund, they could have released the money then and there."

Not likely, replies David Giampaolo, chief executive of Pi Capital. "Smart people know when to cut their losses," he says. "There is a saying about not throwing good money after bad. The fact that the management team couldn't find other means of raising the money was a warning. There isn't a place for a furniture retailer of this size and style. People aren't buying high-ticket furniture items. The story is not Lombok, the story is that furniture retailing is getting crushed. And the idea that things will pick up and will be OK in a couple of months is wishful thinking."

So having failed with the rights issue, Lombok's management was forced to rethink its business model. An expensive warehouse in Twickenham was earmarked for closure (saving the business £1m a year), to be replaced by two warehouses in Asia (total cost, £22,000 a year). The problem was that this required a cash outlay. But before it could be arranged the bank decided things were too shaky and put the business into "bank support". This meant an independent review of the recovery plan, including assumptions of a further 10 per cent drop in sales and margins. This was enough to persuade the bank that the firm was too risky to back. It gave the management team a month to find an alternative. In the meantime, KPMG was given the task of trying to sell the business and sent out details to 45 potential buyers.

Once more Lombok turned to its shareholders and again they refused to help. This time, Cresswell-Turner was less understanding and says he was "saddened" by the lack of support. "This has been a lesson in what makes a good shareholder. I thought anyone prepared to put money in was good. With Pi, every time we went for money we had to engage with 50 or 60 shareholders. These are busy people and are often away travelling, so you can't get hold of them. The process of raising money takes months."

Giampaolo dismisses the claim, saying that for the right investment, Pi can raise money as quickly as anyone. "The idea that we couldn't respond quickly is not true. If you show me a way to turn 50p into £1, I'll get as much money as you need by midnight. The more challenged a business is, the harder it is to raise money. Often the founders are rarely able to face up to the fact that the business could go."

Even Cresswell-Turner, who had spent the previous six months speaking to as many potential investors as he could, admits people were wary when they heard the words furniture and retail. "People were polite but they all said 'great brand, but it's not for us'. We were in the wrong sector and no one was interested."

With the business down to its last three weeks before the bank pulled the plug, one of these conversations finally paid off. Enter restructuring consultants Paradigm. It looked at Lombok's books and decided it was a candidate for a pre-pack, which was duly instigated through KPMG. Pre-packs allow a deal to buy the business to be in place before administration. It means good parts can be separated from the bad, with the process being quick enough not to disrupt the business the new owners want to keep. "Pre-packs are like politics and religion, in that they attract very strong views," admits Cresswell-Turner. "Some are religiously against them and others see them as a mechanism to help good businesses survive." But the system is open to abuse. "The rules have to be watertight. If it's not done in a blue-chip way it can be a process to screw creditors."

This is the concern that has led the Association of British Insurers (ABI) to call for tougher regulations, including a ban on the same insolvency practitioner acting for a company before and after administration. This brings a fresh pair of "eyes" into the process to ensure all creditors' interests are protected.

But Ade Daramy, spokesman for the Insolvency Service, sees no need for change. "We only issued Statement of Insolvency Practice (SIP) 16 in January. This sets out rules for insolvency practitioners to report relevant details in a pre-pack to all creditors, including the involvement of existing management. People calling for change need to step back and give this time to work." Daramy adds that abuse could result in disqualification for up to 15 years. "The administrator is there to work in the interests of all creditors, not just unsecured ones. There are safeguards for creditors."

Cresswell-Turner sees the process as a Pyrrhic victory. "It's been a bittersweet experience," he says. "The company has gone bust and I've lost my shareholding. That's 11 years' hard work just gone." He also says that keeping Lombok going has more significance than jobs saved in the UK. "There are two suppliers in Indonesia that employ 500 people each that would have gone under."

He is adamant that Lombok will do what it can for most of the old company's creditors. Ex-employees will also be protected. The only exceptions, he says, are "some landlords, utility companies and the government". While most landlords were helpful when the company was in trouble, moving to monthly rents and agreeing a 25 per cent rent cut, Cresswell-Turner believes the UK commercial property market is flawed. "How many other countries have upward-only rents or pay quarterly in advance or have 15-year leases? If leases were turnover-based, everyone would benefit on the upside and hurt on the downside."

Despite all he's been through, Cresswell-Turner is "cautiously optimistic". Is it false hope? Malcolm Pinkerton, senior analyst at Verdict Research, agrees with Giampaolo that furniture retailing is in trouble. "We're not predicting an upturn in this sector until 2011 at the earliest," he says. "It is closely linked to the housing market and mortgage transactions are the natural boost to people spending on big-ticket items. As the risk of unemployment rises, people are going to be even more wary."

But Cresswell-Turner maintains that the slimmed-down nature of Lombok means that it can cope with more falls in consumer spending. The biggest error was, he says, committing to bricks and mortar. The business was slow to build an online store, which launched just two years ago. Having once told a journalist "you can't sell furniture over the internet", he now admits: "I believe you can sell furniture through the Web, as long as you have a physical presence so customers can touch it and believe in the brand."

As he reflects on the cyclical nature of the furniture retailing market, does he wish he'd sold at the top? "Professionally, no. I've learned more in the last three years than I did in the previous seven. Financially, yes definitely. And stress-wise, yes. But, on balance, it's been a journey that I won't forget and it will put me in good stead for the rest of my professional life."