Gift and Toy Distributor Hit By Credit Crunch

​​The Challenge

A Southern based gift and toy distributor with a turnover of around £3.2 million was experiencing severe financial distress. Its problems were multifaceted: it was under-capitalised heading into its busy season, and the credit crunch in 2008 meant its bank would not extend a much-needed overdraft increase. This led to significant losses. The situation was made worse by its invoice finance company, which used a strange debtor-day algorithm that reduced the cash available for the company to draw down, further crippling its cash flow. The company also had an associated company which made loans available to the company and was owed over £320,000. One of the directors had personal guarantees with the bank (the company had an overdraft of £150k) and the invoice finance provider (involved via a different financing facility).

The Solution

The company’s director contacted RMT KSA and after an initial consultation, the decision was made to proceed with a Company Voluntary Arrangement (CVA). This solution allowed the company to propose a structured repayment plan to its unsecured creditors. The CVA proposal offered to repay unsecured creditors 37p for every £1 owed over a five-year period. During this process, we also assisted the company in making three staff redundancies to help reduce overheads. The connected creditor (the associated company) agreed to waive its claim to the money it was owed, a usual requirement for HMRC to accept the CVA.

The Results

The CVA was successfully accepted by the body of creditors, but only after a 14-day adjournment for further negotiations. The CVA allowed the company to continue trading while repaying its unsecured creditors over time. Importantly, the bank and the invoice finance provider, as secured creditors, were not part of the CVA and continued to be paid as usual.