CVA Case study – Insolvent Law Firm

Our client approached us through the internet site www.companyrescue.co.uk having read our free 80 page experts guide to company voluntary arrangements (you can download that here free of charge).

The company was over staffed, had falling fee income and also had had the SRA (Solicitors Regulation Authority) warn the board that they should seek insolvency advice., if they failed to give an undertaking to get advice from licensed insolvency practitioners, then the SRA may intervene. Intervention is an aggressive process of taking over clients and filed and effectively closing the company down. It is rare but very expensive for the regulator, if however the firm does not comply with the regulator, the intervention process protects clients.

The problems causes were:

1. Our clients had acquired a smaller midlands law practice but this had been a drain on cash. The bank had not agreed to provide the consideration (price) for the purchase some 18  months previously.
2. The bank reduced the reduced the overdraft.
3. Having suffered a bad debt and falling fee income, the company borrowed money from former clients to pay the VAT bill two quarters in a row. These VAT smoothing loans were quite  expensive.
4. Cashflow problems deteriorated when the main office midlands property rents increased in the normal way after a rent review.
5. PAYE deductions were missed two months in a row, HMRC started threatening to wind the company up
6. Total debtors were £500k, work in progress was £1m but the borrowings and creditor debts were nearly £3m

We took the board of 14 through the various options such as CVA, trading out, liquidation and administration, this free process allows our prospective client directors to focus on facts and options not on hearsay and bar room advice. We then set out a recovery strategy in writing. There was no fee for the initial report.

The key components of that strategy were:

1. Close non performing east midlands offices; transfer the cases and client to a local firm and back to head office when clients would not consent to transfer.
2. Make redundant some 20% of the employees and two partners. Claims for lieu of notice, redundancy were met by the Redundancy Payments Office (DeBIS) under the RP1 process.
3. Agree a debt standstill for 60 days months whilst all of the business options were carefully considered, detailed financial modelling of the company produced by KSA and the internal  accountants
4. Reduce costs of copiers, IT equipment leasing and maintenance from £200,000pa to £30,000, by terminating contracts.
5. Meet with the SRA and set out ALL options and contingency plans if each failed to work. SRA were very supportive and added their own suggestions. Work to avoid intervention.
6. Meet with the bank and get approval for the overall plan for a CVA.
7. Build a CVA proposal, but plan the administration pre pack that would beak up the parts of the firm to other buyers SHOULD the CVA be rejected.
8. Call a meeting of creditors and set out proposals for the rescue and turnaround

The CVA was successfully approved and now our client, is now much leaner, fitter and whilst not running is walking again. There was no requirement for SRA intervention and no need for a prepack administration. Although we had a contingency plan ready to go if the CVA looked like failing.

Two properties have been vacated, costs cut, leasing reduced and employee costs are down. The key deal points are:

1. The bank loans are serviced after a 12 month capital payment holiday,
2. Unsecured creditors will receive 25% of their debt back in 5 years, contributions to creditors in year one set at a low 5,000 per month. The loans for VAT were originally being paid at  £25k per week!
3. Salaries are frozen for two years.
4. All future HMRC debts to be paid on time

One of the senior directors of KSA Group was on site 3 days per week in the crisis period, supported by a team of 4 KSA experts in our offices doing deals with 45 creditors. Now the business needs only periodic assistance.

If your client or indeed your own firm is facing structural debt issues, possible SRA intervention and risk of winding up action by creditors like HMRC, then call our helpline now, or call Keith Steven who is an expert in assisting solicitor firms restructure.

We need to stress that SRA is targeting firms in financial stress, don’t wait for the instruction to get advice from experts in turnaround and insolvency!