West Midlands Software Development Company Failed To Meet Targets

The Challenge

A software development company, a spin-off from a quoted firm, was facing severe financial distress despite having an experienced management team. Sales had failed to meet ambitious forecasts, and the company was struggling with a significant cash flow crisis. The CEO and a venture capital investor had already made large personal investments to keep the business afloat, but the company’s financial position was unsustainable. The situation was complicated by the departure of a managing director, who was owed money under a compromise agreement, and who subsequently issued two consecutive winding-up petitions against the company. The company had a total unsecured debt of £500,000, and its survival was dependent on sales taking off, which was not happening as quickly as the board had hoped.

The Solution

RMT KSA was called in to provide a strategic solution to the crisis. We proposed an innovative “Holding CVA” designed to provide a flexible deal that would give the company time to prove its sales forecasts. The CVA invited creditors to vote for a five-year plan with fixed contributions for the first year. A second creditors’ meeting would then be held within that year to finalize ongoing payments. This approach was highly appealing to the directors, who were convinced that the company would be able to pay off the entire debt within 18 months once sales from two national chains came through. The CVA was designed to hold off aggressive creditors and defeat the winding-up petitions, providing the company with the breathing room it needed to execute its sales strategy.

The Results

The CVA was successfully approved, and KSA defeated both of the winding-up petitions issued by the former managing director. However, despite the CVA’s success in providing a legal framework for recovery, the company’s sales ultimately failed to materialize as optimistically forecast. The company eventually ran short of cash, and HMRC, seeing new tax arrears, petitioned the supervisor to wind the company up. The case highlights a critical lesson: a CVA can be a powerful tool to provide a company with a chance to succeed, but it cannot fix a flawed business model or weak sales performance. The company’s failure to deliver on its sales forecasts, despite further investment, proved to be its undoing. This experience reinforced the importance of using prudent and realistic forecasts when developing a CVA proposal to ensure it is achievable, and of trusting professional advice when it points out fundamental weaknesses within a business.