Case study: East Anglian Plumbing Company

31 October 2014

One of the directors of the company contacted Sarah Massey of KSA to discuss the company’s present financial situation.  Then, after a subsequent telephone conversation with KSA regional manager Malcolm Gray, a meeting was requested and held at the company’s premises.

KSA were appointed to assist the company with a Company Voluntary Arrangement (CVA) in early July 2012. Turnover for the year to 31th May 2012, was c£616K which was a 6.6% increase on the previous year. However the company made a net loss of £90K due to severe increase in cost of sales and administration expenses. 

The company was encountering financial difficulties due to:

- A series of bad debts of c£100,000 suffered by the company over the past 2 years: caused by a small number of the main contractors the company has been working for going into administration and liquidation.

- Serious arrears with trade suppliers who are increasing pressure.

- HMRC debts which the company had serviced thus far was also beginning to become too much of a burden.

Premises

- The company operated from leased industrial premises on an ‘ad hoc’ basis therefore there were no terms of occupancy, termination or dilapidations.

- The landlord was owed a small arrears of £1,300.Fixed Assets- The company had fixed assets of c£15K the majority of which were motor vehicles.Employees:

- Staff levels reduced by 50% over passes 2 years- 2 redundancies made with the assistance of KSA.

- The company still employed 7 staff including directors. 

- Unfortunately 3 staff were made redundant as part of the CVA to reduce costs.Secured creditor

- Bank- The company’s only secured creditor (secured with a registered legal charge or debenture) was a bank, which by insolvency law, stands outside the CVA and is repaid in full via the agreed terms.- The facilities provided were an overdraft of £37K which was unused at the time and a credit card the balance of which was £3.5K. Other Financial facilities  

- contingent creditors. - The company had various Finance facilities (hire purchase) in respect of vehicles the totoal outstanding balance of which was £17K.

- This class of creditor’s balance does not usually crystallise in a CVA.  However, the directors had elected to cancel 3 further agreements utilising the CVA.Directors

- The director’s had provided joint and several personal guarantees (P.Gs) to the secured creditor (bank)

Connected/associated creditors

- The directors had jointly made loans of c£10K available to the company. This class of creditor does not attract a dividend under the CVA. The connected/associated creditors may decide to propose that If the CVA is approved by the creditors they intend to convert their debt to convertible redeemable preference shares. The percentage of their debt to be converted would be the same percentage as the dividend proposed to the unsecured creditors in the CVA with the remainder of the connected (associated) debt being written off.

- It is a usual modification from HMRC that balances of this nature, not converted to convertible redeemable preference shares, are written off and do not survive the CVA. Unsecured Creditor debt: - £169K of which HMRC was 29.6%. 

Early November 2012, a trade creditor served a Winding Up Petition on the company with hearing date of 10th December.  

The creditor agreed to adjourn the hearing on payment of costs to permit the CVA process to complete.  

Late November 2012, the directors decided that the company, and therefore the CVA, was no longer viable and would let the Winding Up Petition take it’s course.  

However, the petitioning creditor failed to advertise the Winding Up Petition in the requisite time (i.e. no later that 7 days prior to the hearing date) and the petition was dismissed.

The directors of the company (which was no longer viable) approached KSA to place the company into CVL (Creditors Voluntary Liquidation)

- the relevant engagement pack was issued, however the company did not return the signed engagement paperwork.

Categories: CVA, What is a CVA or Company voluntary arrangement?