Engineering Company Hit By Recession

The Challenge

A world-class engineering company in the Midlands, with sales of £5 million and a net profit of £400,000 in 2007, faced a severe crisis due to the recession. Demand from its primary client, the automotive sector, plummeted by 40% in late 2008. The situation was particularly grim for the part of the business that produced exclusively for General Motors, which was widely speculated to be on the verge of bankruptcy. This collapse led to a significant cash flow squeeze, as the factoring company pulled funding on the GM debtor book. The company was over-burdened with an unwanted factory, which cost £150,000 annually in rent and £75,000 in rates. With unsecured debt of £745,000 to trade creditors and £322,000 to HMRC, the business needed a radical solution to survive. The directors also faced personal guarantees on some of the company’s lending facilities.

The Solution

The company contacted KSA, and after a free initial meeting, the directors chose a Company Voluntary Arrangement (CVA) over a pre-pack administration. The CVA was designed as a comprehensive restructuring tool to address the company’s financial and operational issues. KSA took over all creditor management, helping to contain pressure and improve cash flow. The company negotiated with GM for payment of arrears and held new deliveries until paid. The plan involved vacating the unwanted factory, which would save £150,000 in rent and £75,000 in rates, and would avoid £100,000 in dilapidations. The CVA also provided a legal framework to make staff redundancies and terminate contractor agreements at no cash cost to the company, saving up to £100,000. The plan also addressed a £160,000 VAT underpayment error without cost or penalty. The CVA proposed to pay 46p in the £1 to unsecured creditors over five years.

The Results

The CVA was successfully approved by creditors in the spring of 2009. The bank and invoice discounting company were supportive and agreed to continue their lending facilities as normal, which was critical for the company’s continued operations. The CVA allowed the company to refocus its efforts on driving sales and a long-term strategy, including a plan for the potential loss of GM business. The restructuring was so effective that in late 2010, the company proposed to exit the CVA with a final payment of 30p in the £1. This was a remarkable outcome, as it allowed the company to complete the CVA three years early. The CVA not only saved the business from liquidation but also enabled it to emerge as a leaner, more profitable entity with its staff and shareholders’ investment protected. The company successfully shed its costly factory space and is now in a much stronger financial position.