Gift and Home Products Supplier Problems Due To Collapse in Sales of Primary Product

The Challenge

A wholesale provider of gift and home products, with a turnover of approximately £3.7m, faced significant financial difficulties. The crisis was triggered by a collapse in sales of a key licensed product, despite the company having already purchased the license renewals. This was compounded by the general recession-driven downturn in sales, a lack of control over licenses and new product areas by the directors, and a particularly poor trading quarter. One of the directors was also out of commission due to a long period in the hospital, contributing to the management void.

The Solution

The company engaged RMT KSA in May 2010 to assist with a Company Voluntary Arrangement (CVA). Prior to the CVA, the company implemented its own cost-cutting measures, including making two redundancies and not replacing each of the 4 employees which resigned, which helped reduce costs and overheads by approximately £1 million. A key factor in the CVA was the presence of a connected creditor—one of the directors—who had provided over £1.2m in loans to the company. The director’s debt was included in the CVA for voting purposes, though they would not receive a dividend.

The Results

The CVA proposal, which offered a repayment of 33p in the pound to unsecured creditors over five years, was accepted by the body of creditors. Despite HMRC holding about 24% of the debt, they did not have enough voting power on their own to reject the CVA, demonstrating the importance of a broad-based creditor consensus. The successful CVA allowed the company to restructure, stabilise its finances, and continue trading with a more manageable cost structure.