IT Services to Education Sector Hit By Credit Crunch

The Challenge

An ITC service provider with a turnover of £3.5 million in 2008-2009 faced a severe and sudden financial crisis. The failure of a large client resulted in a bad debt of nearly £300,000 and a dramatic drop in annual turnover to £2.5 million. This created a critical cash flow gap. The company was burdened with legacy debts of £300,000 to trade creditors and a long overdue tax debt of £180,000 to HMRC, including £149,000 in PAYE liabilities. The managing director had a personal guarantee on a £150,000 bank overdraft. Despite having a time-to-pay deal with HMRC, the company was no longer able to meet the demanding payments. The board was in disarray, with directors and shareholders split on the best course of action, and all options seemed to carry significant risks.

The Solution

The directors contacted KSA, who provided a detailed independent report outlining all available options, including liquidation, administration, CVA, and a trade sale. After careful consideration, the board chose a pre-pack administration as the most suitable option. This was chosen because it would allow for a near-seamless continuation of the business with minimal disruption to customer relations. RMT KSA developed a plan to package the business for sale to a third party. The plan addressed the key risks and downsides, including the need to secure new banking facilities, the marketing of the business, and compliance with SIP 16 (Statement of Insolvency Practice 16), which requires full transparency with creditors. RMT KSA worked with all key stakeholders, including the bank, tax authorities, and major trade creditors, to ensure the process was professional and transparent.

The Results

The business was successfully marketed and sold to a third-party buyer through the pre-pack administration process. A number of bids were received, and the company was placed into administration and quickly sold by KSA’s insolvency practitioner. The outcome was a better result for all creditors, with the bank being repaid in full and unsecured creditors receiving a dividend of between 10p and 12p in the £1, which was considered a much better outcome than a liquidation. The customer relationships were largely maintained, and all employees were transferred to the new company. The landlord agreed to a new lease, and the new owners acquired the work in progress and contracts, setting the business up for a successful future. The case demonstrates that a pre-pack administration, when done professionally and properly, can be a powerful option for a company that needs a radical restructure to save a fundamentally viable business.