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Case Study: Pre-Pack Administration for a London IT Company
Our client is an ITC service provider to a large number of SME companies in London and the South East. Turnover in 2008-9 was £3.5m.
Sales were impacted by the failure of a large client. This caused a bad debt of just under £300,000 but more importantly a loss of future sales. Turnover fell to an annualised £2.5m at the end of 2009.
Keith Steven of KSA Group met the board in late November and early December 2009 when cashflow forecasts were looking bleak, but ironically the sales team had had some success in replacing the lost income. Turnover was forecast to rise back to £3m in 2010.
The resulting “cashflow gap” was the directors’ biggest worry, “legacy debts” had built up to the trade creditors (£300,000) and HMRC was making threatening noises over £180,000 of long overdue tax debts including £149,000 of PAYE liability. The bank had provided an overdraft of £150,000. This was personally guaranteed by the MD alone.
To improve cashflow, the board approached HMRC under the Business Payments Support Service and HMRC had allowed a time to pay deal in June 2009. This deal had been kept up to date until September 2009 despite payments being a huge £20,000 per month. Obviously HMRC also required monthly PAYE debts to be paid on 19th of the following month and VAT to be paid on time.
The TTP payment for October had been delayed and the company had insufficient cash to pay the November TTP payment OR the ongoing PAYE of around £36,000 for November.
A crisis in the cashflow was looming (had already crystallised in our view) and the board had fallen out with each other and the largest shareholder on the courses of action. The members (shareholders) could not provide any further funds and the directors were split as to the route to take next.
KSA Group’s standard approach for every client that we meet is to provide an independent report to the board on the options available. These included liquidation, administration, pre-pack administration, company voluntary arrangement and selling the company.
Liquidation Option: We discounted voluntary liquidation as an option because there was clearly a fundamentally viable company, providing the costs were cut further and cashflow problems dealt with. In our view liquidation would not have maximised creditors’ interests and a good business would have been closed.
Company Voluntary Arrangement: The directors did not wish to use a CVA as they believed the company would be loss making in the first few months and the new investors they had available wanted a “clean” vehicle to provide funds to.
Trading Administration: KSA Group would have been prepared to take the appointment to trade the company in administration whilst a buyer could be found. However the bad press that a trading admin would lead to was deemed to be too risky for the business. In administration EVERY email, invoice and purchase order has to state that the company is controlled by Mr X and Mrs Y as Administrators. Rightly or wrongly, the directors thought this would result in lost customers.
Pre-pack Administration: The option most favoured was to package up the business for sale to a third party. This would allow the maximum benefit to the “newco” and the last damage to customer relations.
In our report we set out the pros and cons of the approach to be absolutely clear what the process involved. Below is an extract
- - Pre-Pack Administration to newly formed company
- Business continuation virtually seamless
- Cost effective restructuring method
- “Newco” will acquire Goodwill, trading name and assets
- Cost of assets to be determined by RICS Valuer (chartered surveyor)
- Deferred consideration for asset purchase as required
- Newco will also acquire work in progress and contracts
- Debtors collected by administrator post administration
- Removes creditor pressure, oldco either liquidated in future or dissolved
- Short preparatory period, very swift execution period
- Clients largely unaffected or aware
- Possible small dividend to oldco creditors of 5-15%, thus achieving administration objective of getting “Better Result” than liquidation
- Bank will be paid in full, removes risk of personal guarantee being called up
- Possible risks and downsides
- Possible security deposit required by HMRC for Newco (very unlikely)
- New banking facilities will be required
- NB: All insolvency processes carry risk for the oldco company directors
- Cost of administration, valuers, lawyers.
- TUPE issues apply in Administration, all employees would be employed by newco
- Needs working capital to fund future trade
- Needs the buyer to have ready funds to purchase assets
- Formal investigation into director’s conduct
- Business must be bought for value close to that set by external RICS surveyor
- Requires new lease with property landlord
- Marketing of the business is essential, KSA Group will market on its websites and use the RICS surveyor to market in the press etc
- Compliance with “SIP 16” essential
- Must get a better result than liquidation.
- Shareholders’ investment will be written off
The board agreed to the pre-pack administration process in early 2010 and the business was marketed for a short period. KSA spoke to the bank, tax and major trade creditors as is required by SIP 16, (Statement of insolvency Practice 16).
A number of bids were received and the business was then placed into administration and quickly sold by one of our insolvency practitioners, Eric Walls, to a third party buyer.
The customer relationships were largely unbroken, work in progress and stock was purchased by the buyer, all the staff were TUPE’d across to the newco. The landlord agreed to a new tenant. The administrators have collected out a good percentage of the debtor book with the former managing director’s assistance.
The company was insolvent, cashflow had gone critical and the creditors were starting legal action. ”Firefighting” was taking up nearly all the MD’s time and the business was going to collapse. Unfortunately, the directors were also in disagreement and shareholders split as to the best route to take.
KSA carefully discussed EVERY option and then produced a written report that set out the recovery strategy. The overall impact was a better result for all creditors. The administrator expects to pay a final dividend of c10-12p in the £1 to unsecured creditors, having repaid the bank debt in full.
If your company is in distress and a radical restructure is required for the viable business, a pre-pack administration, DONE PROFESSIONALLY and PROPERLY is a powerful option.
We are experts in business rescue, corporate rescue and company rescue, we can help investors, shareholders, sole traders, partners and directors with pre pack administration solutions.
Call Keith Steven now if you are a struggling London IT company - 07974 086779.
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