Logistics and Distribution Company Dragged Down By Loss Making Contract

The Challenge

A business facing a severe cash flow crisis due to rapid over-expansion found itself with three under-utilized warehouses and a significant loss-making contract with a major Japanese multinational customer. Losses approached £900,000 in the year to 2007, and the directors and investors could no longer provide additional funding. The company had too many people and insufficient profitable work. Its bank was growing nervous about its exposure of £800,000 on loans, and the company was struggling to manage its fixed costs, including a lease on one property with £900,000 in rent arrears and an annual rent of £1.1 million. The situation was compounded by a winding-up petition from a restless creditor. The company needed to terminate several contracts, reduce overhead, and restructure its debt to survive, but administration was considered insurmountable due to the complexity of the contracts and the potential for a nil return for creditors.

The Solution

The company engaged KSA to use a Company Voluntary Arrangement (CVA) as the core tool to enable a radical restructuring. The CVA was designed to achieve several key objectives: close two sites and terminate their leases, consolidate all activity into a single, half-empty warehouse, and reduce the headcount by 20% to save a total of £600,000 in fixed costs. KSA also tackled a highly complex and loss-making supply contract with the Japanese customer, successfully arguing that the CVA could terminate the agreement. The core of the CVA was to broker a deal with the remaining landlord to accept a new lease with an increasing rent over five years, with arrears compounded within the CVA. This deal was considered a commercially viable alternative to a liquidation, which would have offered the landlord nothing. After a prolonged period of negotiation and a complex legal process, the CVA was ultimately approved.

The Results

The CVA was successfully approved, demonstrating its power as a tool to enable major structural changes in a distressed business. The CVA was used to terminate property leases and an onerous customer contract, which a traditional administration would not have achieved. The restructuring enabled the company to rapidly remove fixed overhead costs with a nil cash cost, and it provided a flexible framework for a new deal with the main landlord. The CVA deal proposed that unsecured creditors would receive 28p in the £1 over five years, a far better outcome than the £5.3 million deficiency and zero return they would have faced in a liquidation. The company was able to continue trading and successfully restructured its business, saving a viable company that would have otherwise failed. This case, which took five months to conclude, set new ground by using a CVA to achieve things that are normally not possible, such as terminating difficult contracts, and is a testament to the versatility of a CVA as a business rescue tool.