Company Voluntary Arrangement for a LLP
Many venture capital companies, hedge funds, law firms and accountancy practices trade as limited liability partnerships or LLP's.
LLP's are tax effective, flexible and offer a less risky trading structure akin to Limited Liability Companies. Unlike ordinary partnerships however, the individual designated members have limited liability.
So what happens when things go wrong and the business becomes insolvent? In many ways the solutions are the same as for companies. If a LLP is insolvent, distressed but could be viable, then CVA can be a powerful agent for restructuring. It may be necessary in some cases to place the company into administration first, but generally if the designated members act early enough a stand alone CVA will suffice.
If the LLP is NOT viable no matter what changes are made then liquidation is the most likely tool, or of course assets may be sold through administration.
Our client is a medium sized firm of solicitors that had grown sales rapidly, with a number of estate agencies providing fast growing volume conveyancing income. Having acquired another firm of solicitors to grow commercial and litigation income, it was highly geared when the credit crunch hit in 2008.
Barclays Bank plc had provided loans for buildings and practice overdrafts. Other asset based lenders had provided practice acquisition loans and property development leases.
There was a well developed recovery plan but it was plain that the recovery depended upon cutting costs, closing non performing estate agencies, removing 30-40 people and the means to do that without a formal insolvency tool didn't exist.
Even if Administration was chosen by the bank or LLP or an administrative receiver was appointed, the Solicitors Regulation Authority would intervene, the costs of which would be a first charge on the assets of the LLP.
Clearly, this would severely reduce the value of assets available to the fixed and floating charge holders and unsecured creditors. The cost of the intervention would have been significant and the recovery (outside of fixed charges on property) for the bank negligible.
Keith Steven of KSA Group was invited by the designated members to review the situation and prepare a strategy for the turnaround. Barclays had also requested that BDO Stoy Hayward's London office review the position for the bank. The rescue was in effect a joint venture between BDO and KSA.
Using a CVA as the control technique was agreed as the best option but it appeared that very few if any LLP's had gone through such a process. Certainly no law firms had.
KSA has a unique bespoke CVA forecasting tool that is very powerful and maps the restructured balance sheet, shows profit and loss, balance sheet, cashflow and utilisation of funds forecasts month by month for 5 years. Proprietory forecasting tools cannot accurately map the effects of a CVA on the balance sheet without fudging and compromising the model's integrity.
Unfortunately the tax issues of a LLP were not something our forecasters had come across either! We had to restructure the model to show the effects of personal tax issues on an (effectively) corporate structure.
Taking advice from the HMRC on taxation of designated members was useful in this process, but without knowing the full scale of the losses in the business we were not able to precisely deal with the likely taxes in future. Assumptions were made about the opening tax position and HMRC agreed that that was a sound process and adjustments could be made in future.
HMRC recognised that, unlike a normal partnership voluntary arrangement, there was no need to prepare individual voluntary arrangements for the partners because of joint and several liability. As designated members they were protected by the LLP (providing they act properly).
Creditors were beginning to get restless and a concerted effort was made to inform them of the position, pointing out that the property market had almost collapsed and that a plan was under way to deal with the fall out. Generally our approach is to keep creditors informed of the rescue plans, process timetable, cost cutting and other headline issues.
Structuring the CVA proposals itself was more straightforward, we adapted the normal proposals to accommodate the modest number of differences between LLP and LTD. One notable difference is Section 214A Insolvency Act 1986 (Adjustment of Withdrawals) which sets out the policy if a LLP is wound up. In effect the designated members may be personally pursued for excessive withdrawals from the LLP, in a similar manner to wrongful trading.
Finally the CVA was ready and the nominees for the CVA were Mr Malcolm Cohen and Mr David Gilbert of BDO Stoy Hayward, 55 Baker Street, London, W1U 7EU. The deal was 71p in the £1, versus a likely deficiency of £2.8m in winding up equating to 3p in £1 in winding up. The 3p did not take into account the likely SRA intervention costs.
Barclays were very supportive and agreed some capital payment relief, as did some of the asset based lenders.
KSA introduced an independent part time Financial Director as part of the recovery programme. An ACA he is assisting in the provision of accurate monthly management information (a condition of the CVA is that the MI is provided to the joint Supervisors and Barclays).
The Creditors meeting was held in September 2008. No creditors attended the meeting with 100% of those voting sending proxies in favour.
Conditions remain tough for the LLP and the green shoots in the housing market are very important for this business to survive.
Viable LLP's can be deeply restructured and turned around using company voluntary arrangements (CVAs). Rules, structure and proposal process are very similar to limited liability company CVAs. Care needs to be taken with the tax implications of the designated members in the forecasting process.
For law firms the extra consideration is the possibility of intervention by the SRA (Solicitors Regulatory Authority) when administration or receivership is threatened.
With the future structure of law firms likely to change rapidly after the Clementi reforms become law, CVA presents a powerful solution for struggling law firms trading as LLP's.
Remember, in the event that a law firm trading as a LLP was to enter, administration, voluntary winding-up, or an administrative receiver was appointed, the Solicitors Regulation Authority would intervene, the costs of which would be a first charge on the assets of the LLP
Inevitably this would severely reduce the value of assets available to the fixed and floating charge holders and unsecured creditors.
Other LLP's can be sure that CVA can be powerful turnaround tool.
For further advice on LLP restructuring please contact KSA on 0800 9700539 or email firstname.lastname@example.org