Construction Company Was Undercapitalised

The Challenge

A construction company, which served as both a main and a sub-contractor, faced significant financial difficulties despite a turnover of approximately £800,000 in the year to June 2012. The company’s problems stemmed from being undercapitalised, facing interrupted contracts, dealing with bad debts, and operating in a highly competitive environment. The situation was made worse when a major client withheld a payment of around £77,000. After a period of costly arbitration, the directors were forced to accept a greatly reduced payment of just £14,000. The company was burdened with a substantial unsecured debt of approximately £229,500, with HMRC holding a massive 90% of that debt at around £208,000. The directors, who had previously experienced a company liquidation due to over-ambitious CVA forecasts, were under immense pressure to find a viable solution.

The Solution

Having learned from past experience, the directors contacted RMT KSA, who was appointed on August 14, 2012, to assist with a Company Voluntary Arrangement (CVA). The CVA was chosen as a a strategic tool to provide a better return to creditors than a liquidation, while allowing the company to continue trading. The CVA proposal offered a dividend of 33 pence in the £1 to unsecured creditors. The company’s directors had a strong desire to avoid the mistakes of their previous business, which had failed to deliver on an over-optimistic CVA. Therefore, they worked closely with KSA to ensure the CVA proposal was a realistic and achievable plan that took into account the tough market conditions and the company’s financial realities. KSA also took on the crucial task of negotiating with HMRC, which was the largest unsecured creditor.

The Results

The CVA was a complete success. Although HMRC initially rejected the proposal, RMT KSA successfully appealed to the Voluntary Arrangement Service, leading to HMRC’s approval with standard modifications. With HMRC holding 90% of the unsecured vote, their acceptance assured the outcome. The CVA was formally approved by the body of creditors at a meeting in Weymouth on March 5, 2013. This outcome provided the company with a legal and structured way to manage its debt and continue its business operations. The CVA was instrumental in saving 9 jobs and provided a better return to creditors than a liquidation would have. The case demonstrates that even a company with a history of financial struggles and a high tax debt can find a path to recovery through a CVA, particularly when the directors are committed to a realistic and well-supported plan.