"We have a failing company whose investors have invested £1m, plus £7m of loan notes. HMRC is threatening to wind up the company for unpaid VAT and PAYE".
So started a conversation with a distressed company director with Keith Steven. After 20 minutes we established the following position.
1. The company had a turnover of £4.4m in the last 6 months. Its had previous year sales of £8.9m.
2. Trade creditors amount to c£506,000.
3. Inland Revenue was owed c£834,893 for PAYE and NIC, various time to pay (TTP) deals had been agreed and reneged upon owing to cashflow pressures.
4. VAT was owed approximately £45,000.
5. Investors funded the MBO that formed the group holding company. Investors had provided loan notes of £5.3m, interest has been accruing and interest stood at £738,365. Directors/shareholders had provided a further £808,000 of loans and interest was accruing as above.
6. The Bank was owed £550,000 on a term loan. It also provides an overdraft of £150,000 to the Group Holding Company. Currently the bank overdraft was standing at £216,000 (nominally). The bank held a debenture with a fixed and floating charge on all monies due from both companies on a charge created 17th November 2006.
Invoice discounting was provided by the same bank. The current facility provided for 85% initial payment. Overall the facility provides an advance of £1.091m. The debtor book was currently £1.329m.
Our caller wanted to know how to stop a winding up petition, how could KSA reorganise the business such that the venture capital backers / loan note holders did not take a complete bath and so that he could invest some money in a recovery whilst removing non performing directors and management. Not an easy challenge!
Given the acquisition had been driven through a "whitewash" procedure to avoid breaching the Financial Assistance rules (s151-153 Companies Act 1985) , the inter company position was that Holdings owed trading co some £700,000. This was never going to be recovered because the only value that Holdings had was 100% of the equity of trading co, it was insolvent and about to enter a administration! Secondly, the loan notes and equity investment were at risk if the trading co entered administration or pre-pack Administration.
We considered pre-pack administration but the bank was not keen on that option nor were the VC investors or the loan note holders (the director was the largest loan note holder). So a company voluntary arrangement seemed the logical answer for the trading company.
To find out more about the innovative solutions that resolved all these seemingly conflicting interests for the VC investor, loan note holders, the bank and invoice discounter, new management and the new investment see this new Case Study here - Leveraged Buy In Management Buy Out".
If you are a venture capital or private equity investor with troubled clients, call Keith Steven on 07974 086779 or Eric Walls on 07787 278527.