Technology

Case Study 1 – Software Development Company Struggling Due to Rapid Growth and Undercapitalisation

The Challenge

A software development company with a turnover of approximately £684,000 faced significant financial difficulties despite a recent increase in sales. The core problem was that the company was undercapitalized due to rapid business growth, which it could not financially sustain. This led to large borrowings, including a significant £60,000 unsecured overdraft and a flexible loan of about £140,000. The company was also unable to keep up with its tax obligations, failing to adhere to a “Time To Pay” arrangement with HMRC. With total unsecured debt of £333,000, of which 60% was owed to HMRC, the business was under immense pressure. The directors were at personal risk due to personal guarantees on the unsecured bank loan, and HMRC had served a winding up petition, pushing the company to the brink of liquidation.

The Solution

The company appointed RMT to assist with a Company Voluntary Arrangement (CVA). On RMT’s recommendation, the company instructed legal representation to handle the winding up petition, successfully obtaining an eight-week adjournment to allow time for the CVA process. The directors also addressed a key issue by repaying very large overdrawn directors’ loan accounts, ensuring the CVA proposal was robust. The CVA proposed a repayment of 43 pence for every £1 to unsecured creditors over five years. Although HMRC, the largest unsecured creditor, rejected the CVA twice, RMT worked with the company to satisfy their concerns. This required a series of negotiations and modifications, which led to a two-week adjournment of the creditors’ meeting to finalize the terms.

The Results

After a protracted negotiation process, the CVA was finally approved by the body of creditors. This approval was a critical success, as it led to the dismissal of the winding up petition at the return hearing date, allowing the company to avoid immediate liquidation. The CVA enabled the company to continue trading and honor its debt in a structured manner. However, while the company initially adhered to the CVA contributions, it was ultimately unable to sustain itself. In June 2014, the directors placed the company into administration. While the long-term outcome was not successful for the company as an entity, the CVA provided a vital period of legal protection and a structured attempt at recovery. It offered a crucial opportunity for the business to stabilize and for the directors to explore all possible avenues before a final decision on its future was made.

Case Study 2 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 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 RMT 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.