Our client approached KSA after reading our website and our experts guide to company voluntary arrangements.
The managing director who is a self confessed sales man and not really a great financial controller had built up sales to £4.5m pa in 2009 with clients like Morrisons, Sainsbury's etc.
The company provided mainly eastern European workers to warehouses in the Midlands on fixed rates. Working with a Gangmasters licence and high quality standards was of course vital to work with blue chip customers.
His accountants advised that he needed to grow the management team and set up a platform for a £10m sales business. This he duly did but had very poor luck with the management recruits. At the same time as recruiting and growing the management team they opened a new branch in East Midlands.
The expansion was funded out of working capital and invoice discounting facility from IGF Invoice Finance who were and remain very supportive.
After 6 months the MD realised that the 6 extra managers, 6 PCs, 6 expense accounts and 6 extra cars had not been covered by increased sales and margins. Indeed the margins were under top down pressure and losses began to mount. Managers and their staff costs were mounting up and the new branch had also failed to cover its costs.
After losing £350k in the 2009 financial year the business started building up PAYE and VAT liabilities to cover cashflow problems. A time to pay deal was arranged and the company began paying £20k per month to catch up.
The MD decided that enough was enough and fired 5 out of the 6 managers. The cars which were on short term hire were returned and the laptops sold.
Still losses mounted.
As is often the case the financial management information was not of good enough quality and the accountants discovered, they thought, a massive underpayment of VAT (£400k). This was declared to HMRC who promptly stopped the time to pay deal and stated they would wind the company up if the taxes were not paid in 7 days.
That's where KSA Group come in! The MD called KSA and asked for advice on the options available and how to deal with the HMRC 7 day warning letter. We quickly assessed the options of Pre-pack administration, creditors voluntary liquidation or company voluntary arrangement were verbally considered and the MD requested to discuss them all in more detail at a free initial meeting.
Keith Steven attended the meeting and it was agreed that because the MD had largely got the costs cut and the business at a profitable level, a CVA was the preferred route to solve the large tax liability.
This is a good sign, the MD KNEW he had to make changes and had driven them through but the LEGACY debts left behind from the failed expansion were crippling the company.
Whats more an aggressive creditor would imminently result in a winding up petition.
Once the CVA was under way, KSA met with IGF who were very supportive and this meant that the MD could continue to drive sales knowing the factoring company was right behind him. KSA dealt with the HMRC and it agreed not to issue a winding up petition, if the CVA was delivered in reasonable time.
The company had recruited a quality financial controller and now the financial reporting as much improved and current, this is a condition of KSA's CVA proposals that the company post CVA approval produced regular management account. This control is vital to ensure that future early warning signs are spotted. And of course every director should KNOW what the financial position of the company is.
So what was the financial position when the CVA was proposed?
• The company had a turnover of £3.6m in the prior 12 months.
• Inland Revenue was owed approximately £484k for VAT and £180k for PAYE and NIC:
• Employees claims in insolvency would have amounted to c.£100,000 for redundancy and lieu of notice claims.
• The Bank was Natwest Bank Plc and was owed £20,000 on an overdraft. The directors provided a personal guarantee to the bank.
• Debtor payments of c.£450k were due to the company in the next 14 days. The main customer paid in 14 days. The debtor book was discounted by IGF which was owed £550k.
• The company had £100 of share capital.
Insolvency Issues or 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 company's 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.
What was the CVA Deal?
The business was facing difficulties trading in a CVA so it was suggested by Keith Steven that it was hived down to a new subsidiary wholly owned by the company. This would provide a clean balance sheet and the ability for the customers to stay with the business.
The company hived down its cash, debtors, assets and most of its trading to a new wholly owned subsidiary company. This new company now trades with clients, contractors and suppliers.
The subsidiary took on the employment liabilities and the newco paid an agreed management charge each month to Topco
Discussions took place between KSA, the board and the company's secured creditor IGF about the company's financial position and the secured creditors still provide the company with an unchanged factoring facility today.
Update 2012, after a successful first year the company exited the CVA 4 years early and is now free of the CVA having paid around 25p in £1.
If you are a recruitment or personnel company and have an insurmountable HMRC liability give Keith Steven a ring on 07974 086779. Or download our Experts Guide to Turning Around you Recruitment company here
Or call our recruitment company insolvency experts Eric Walls on 07787 278527, or Iain Campbell on 0800 9700539, 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.