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Midlands based subcontractor - CVA case study

The director of the company contacted KSA to discuss the company’s present financial situation. A meeting was requested and held at KSA’s London offices. Attending the meeting were the directors and Keith Steven, Managing Director of KSA. The company provided subcontracting services to utilities companies. 

KSA were appointed to assist the company with a Company Voluntary Arrangement (CVA) in November 2010. Turnover for the year to March 2009 was c£1.9m. 

The company was encountering financial difficulties due to:
- Fast growth
- Being undercapitalised
- Recruited management did not perform to the directors’ expectation 
- A large contract was loss makin.
- Build up of legacy debts from previous losses, resulting in non payment of HMRC liabilities. The company previously had Time to Pay agreements with HMRC, however these failed

Premises
- The company occupied leased offices

Employees:
- The company employed 15 staff including the director

Bank & Financial facilities
- The bank provided a £25k overdraft facility
- The bank was unsecured i.e. there was no registered legal charge over the company’s assets
- There was no invoices finance facility
- The company had no outstanding finance agreements

Director
- One of the directors had provided Personal Guarantees (PGs) to the bank in respect of the overdraft.
- There was an overdrawn director’s loan account of c£30K i.e. the director owed the company the money: it is usually an HMRC modification (condition of acceptance) that any balance of this nature is repaid within the first 6-12 months of the CVA

Unsecured Creditor debt:
- £640K of which HMRC was 99% 

Cost & overhead reduction 
- Overheads were reduced to a more manageable level.
- The retained workforce was reduced however, the directors were confident this would not compromise quality

Other issues:
- Prices were increased to a level which would generate greater margins and ultimately higher net profitability.

A winding up petition was served on the company by HMRC. HMRC agreed not to advertise the winding up petition after viewing a draft copy of the CVA (NB: the advertising of a winding up petition usually causes the bank to freeze the account, therefore it is always best if an advertisement is avoided).

The winding up petition hearing in February 2011 was adjourned until April 2011 to permit the CVA to be filed at court and the creditors meeting to take place. 

The nominee’s review was held and the CVA and nominee’s report were subsequently lodged at court in February 2011. The CVA proposed 61p in £1 repayment to unsecured creditors over 5 years.

Following HMRC requesting clarifications regarding the proposal, KSA Director & Insolvency practitioner Eric Walls responded to HMRC. HMRC then provided their response accepting the CVA with additional modifications which would ultimately increase the minimum dividend payable to the unsecured creditors over the five years of the CVA to 70p in £1.

The CVA was accepted by the body of creditors at the creditors meeting held in February 2011 and the company went into CVA. The winding up petition was dismissed as the adjourned winding up hearing.

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