The Norfolk based Haulage Contractor contacted KSA after reading our website guide to company voluntary arrangements. Their business had grown pretty steadily over 8 years or more with most of its activity from moving FMCG products for a well known discount retailer, from distribution warehouses to their south east retail outlets on a just in time basis.
If the truth be known the business was in danger of growing too fast and was not under good financial management control. Having done the accounting work on a Sunday afternoon they brought in a part time bookkeeper in 2008. This was deemed expensive but sufficient!
The facts presented to KSA were that a bad debt of £70,000 was the cause of the cashflow crisis - which normally leads to directors calling KSA for help. Our view was, ok the bad debt was the final straw but there were other management and financial reporting issues that needed to be addressed.
During our FREE INITIAL EXPLORATORY MEETING which we carefully compared the two main options for restructuring, i.e. pre-pack administration versus CVA
The decision to go the CVA path was driven by the practical difficulties of SIP 16 in a pre-pack administration and the Operators Licence issues.
By using CVA, the operators licence can stay in situ with the company, whereas in a pre-pack there would have been major logistical problems getting the OL, especially for a new clean company how would it prove it had adequate working capital to satisfy the OL rules?
So what was the financial position?
- The company had a turnover of £3m in the last 12 months.
- Trade creditors amounted to c. £20k for tyres and parts.
- Inland Revenue was owed approximately 400k for VAT, Corporation Tax, PAYE and NI
- A time to pay deal had recently failed. This was the third time to pay deal with HMRC dating back to 2009.
- Employees claims in insolvency would have amounted to c.100,000 for redundancy and lieu of notice claims.
- The Bank was HSBC Bank Plc and was owed £20,000 on an overdraft. The directors provided a personal guarantee to the bank
- HSBC Bank Plc held an all monies debenture with a fixed and floating charge created in November 2003
- Fixed assets amounted to c.£476,000. This is made up of trucks and trailers and most were financed through asset based lenders such as Close Asset Finance and Scania.
- Debtor payments of c. £125k were due to the company in the next 14 days. The main customer paid in 14 days.
- The company had 100 of share capital.
Insolvency Issues to Is my company insolvent?
We reported to the directors that the company failed one of the three insolvency tests under s123 Insolvency Act 1986. It had no outstanding legal actions but DID have threats of a winding up petition by HMRC. It had a solvent balance sheet BUT the company could not pay its debts as and when they fell due.
Thus the company was insolvent and the directors were told that they must act responsibly. The veil of incorporation could be lifted if the companys financial position gets any worse and the directors (and any other officers of the company) made personally responsible for the debts and or face wrongful trading accusations. It is also possible that the directors could face disqualification action if the company's position gets worse.
The company's financial reporting was not up to date and of poor to medium quality. We strongly recommended that the company uses the services of a good quality management accountant. KSA Group introduced a firm in Essex to the company to provide this service in future.
Here is the solution that we set out for the board :
The company should propose a Company Voluntary Arrangement (CVA)
- Contains creditor pressure
- Improves cashflow
- No new banking facilities required
- Refocus director and the shadow director on running the business
- Drive sales past break even
- Open new business accounts to eventually dilute main customer
- Director remains in control
- Board remains in control
- Shareholders investment not written off
- Retain tax losses
- No directors conduct investigation
- Determine lease contract with CVA if required
- NB: All insolvency processes carry risk for the company
Appoint new accountancy firm to provide meaningful monthly management accounts (Optional)
Essential that the company provides management accounts to the CVA supervisor (condition of CVA)
We recommended Insight Associates of Stansted or a similar firm
The director was not sure about the CVA process which of course was understandable. However a 7 day warning letter from HMRC Enforcement was received about a week after we set out our strategy! After some further deliberations, KSA was appointed a few days later to assist with the CVA restructure.
Although, KSA quickly spoke to HMRC and got agreement that the company could prepare a CVA, HMRC stated that the winding up petition had been sent out
We agreed that the winding up petition would NOT be advertised and therefore we still had sufficient time to prepare the CVA proposal carefully. A petition, once advertised, will mean that the bank will freeze your accounts.
Operators Licence issues
As usual KSA's careful due diligence and very detailed CVA forecasts and proposals were put together by our expert team and the forecasts assessed by our Finance Director and analyst, Andrew Hunter.
KSA Group held discussions with the vehicle leasing companies concerning the CVA plan and they agreed that the vehicles would continue to be operated under the existing leases and HP agreements. We also set out an approximate plan for the future capital expenditure plans for fleet replacement. Obviously the finance houses could not make any promises, but by being open and upfront we would expect that if the company performs well in the CVA, that the lessors will provide future financial facilities.
After about 6 weeks of restructuring work, the CVA proposal was put together and discussed with the bank and the final draft signed off by the director.
After filing at Court and calling the meeting of creditors the CVA was approved by HMRC sending in their proxy by fax, after only 7 days.
What was the CVA Deal?
As usual we built in a profit ratchet to allow higher payments to creditors if the company made more profit than originally anticipated. A dividend of 39p was proposed and agreed by 100% of creditors at the creditors meeting.
If you are a haulage and or logistics company that needs to be restructured avoid the risk of administration or failure. Call the CVA experts now. We can quickly get the business costs DOWN and get the business protected from creditors.
Call our haulage insolvency experts Eric Walls on 07787 278527, or Keith Steven on 0800 9700539 or 07974 086779, for a confidential discussion. We will arrange a free meeting at either our or your offices to discuss ALL options, including the CVA options described above