Care Company Suffering From Poor Financial Management

The Challenge

A company in the care sector, incorporated in 2002, was experiencing significant financial distress. Despite a turnover of approximately £681k, the business was undercapitalised and suffered from poor financial management, operating in a low-margin sector. It had failed multiple Time to Pay (TTP) arrangements with HMRC, leading to a large unsecured creditor debt of £136.5k, with HMRC accounting for a massive 93% of the total. The director had also provided personal guarantees to a creditor. The crisis reached its peak when HMRC served a winding-up petition on the company.

The Solution

The company’s director contacted RMT KSA, and a meeting was held in April 2014. RMT KSA was appointed to assist with a Company Voluntary Arrangement (CVA). The CVA proposal was ambitious, offering a 100p in the pound repayment to unsecured creditors over five years. The CVA and nominee’s report were lodged in court, and the winding-up petition was reviewed.

The Results

The CVA was rejected by HMRC at the creditors’ meeting. HMRC, as the majority creditor, raised three key concerns:

1. Preferential Treatment: HMRC believed the company may have used PAYE/NIC monies to bolster cash flow, effectively preferring other creditors over HMRC.
2. Lack of Profitability: The company’s increased turnover had not yet translated into profitability, raising doubts about its future viability.
3. Contingent Liability: The CVA proposal did not adequately account for a possible, unvalidated contingent liability, which could dilute the dividend for other creditors if it materialized.

Due to HMRC’s rejection, the CVA failed. The company was subsequently ordered to be wound up at the petition court hearing, resulting in formal insolvency and the end of the business.