A Southern Based Gift and Toy Distributor – CVA case study

The director of the company contacted Eirlys Lloyd of KSA to discuss the company’s present financial situation.  Then, after a subsequent telephone conversation with KSA Managing director Keith Steven a meeting was requested and held at the company’s premises. The company operated within the duty free sector.

KSA was appointed to assist the company with a Company Voluntary Arrangement (CVA) in Mid 2009. Turnover for the year to February 2009 was c£3.2 million.

The company was encountering financial difficulties due to:

• Being under capitalised when entering its peak buying season
• The UK clearing banks well-publicised problems meant the “normal” increase in overdraft due in that period (Autumn 2008) was not available.
  (Sales were well below budget because of this and serious losses were made in October 2008 to March 2009).
• Cash was turned quickly into stock and then debtors, but the invoice finance company had unilaterally caused further cash flow problems due to a strange debtor-day algorithm that seriously reduced cash available for drawdown when debtors took longer to pay.

Premises

• The company occupied leased offices.

Employees:

– The company employs 6 staff including the directors
– KSA assisted with 3 redundancies.

Bank & Financial facilities

• The company had an overdraft facility with the bank of £150K
• The company also had a an invoice finance facility with a separate provider.
• Both the bank and Invoice finance provider held security over the company which meant that they are secured creditors and as such continue to be paid as usual during the CVA.
• In this case, the CVA was not used to assist with the cancellation of any finance agreements.

Director

• One of the directors had provided Personal Guarantees (PGs) to the bank and invoice finance company.

The CVA is sometimes a trigger for the creditor (especially if unsecured) to seek to rely on personal guarantees provided. This kind of negotiation is something KSA are well versed in and deal with regularly.

Connected creditor

– An associated company had made loans available to the company of c£320K. This company would therefore be classed as a connected creditor – It is a usual HMRC modification (condition of acceptance) that all connected creditors agree to waive there claim to any monies owed and that claim does not survive the CVA. However, they are permitted to vote at the creditors’ meeting

Unsecured Creditor debt

• £636K of which HMRC was 20% Cost & overhead reduction
• As detailed above, the company had made 3 redundancies utilising the CVA.

The nominee’s review was held and the CVA and nominee’s report were subsequently lodged at court. The CVA proposed 37p in £1 repayment to unsecured creditors over 5 years.
The CVA was accepted by the body of creditors at the creditors meeting which had been adjourned for 14 days for further negotiations.