A Scottish based recruitment business approached KSA Group as it was struggling having seen its turnover fall from a peak of £6.75m in 2007 to c. £3.5m in 2009/10. The recession caused this sharp decline in sales as companies stopped hiring.
Additionally and crucially, the business had suffered from bad debts from customers linked to the construction industry. Debtor collection was slow and there were a number of invoiced debtors that the factoring company referred back to our client for collection due to the age of the debts. This ultimately caused the company to suffer worsening cash flow problems.
Our client was on a time to pay deal of some £43k a month with the HMRC and was not able to make the next payment. Trade creditors amounted to £80k and HMRC was owed some £237k for PAYE and £299k for VAT. Even if sales rose the company's working capital could not sustain the monthly repayments under the time to pay deal and the ongoing monthly payments.
Our initial discussion highlighted another regular problem, the fact that the company director had a significant overdrawn directors current account, Mr M had been taking money out of the company using drawings with a view to future dividends. As the company had no profits to distribute, he was in fact now a company debtor to the tune of £75,000.
So the business failed the insolvency tests. KSA Group's standard approach for every client that we meet is to provide an independent report to the board on the options available. These included liquidation, administration, pre-pack administration, company voluntary arrangement and selling the company. However the business still had some good orders going forward, and was a viable business if the legacy debts were restructured. Having considered all the options it was decided that a company voluntary arrangement was the best option. A profit ratchet was built in to the CVA to ensure that if the business made more money than originally predicted then further payments would be made into the CVA. The business was advised to terminate their lease on one of their offices and any future rent liability would be bound into the CVA, staff costs were reduced and creditors were paid in installments.
Mr M agreed to repay the overdrawn directors current account by paying an initial 20,000 and then the balance over 60 months, the CVA being 5 years long. His salary was increased to allow for this.
If you listen to critics in Scotland they will tell you that no CVAs are supported by HMRC! On the contrary the HMRC team that deals with Scottish CVAs attended the meeting and took part in the process. The CVA vote was 100% in favour and the CVA was accepted by creditors in December 2009 paying 33p in £1.
The business continues to trade quite well even though the Scottish economy continues to suffer. Our client has been profitable in the first 9 months since the deal was approved. Mr M is so happy with KSA's work that he has referred a hotel and another recruitment company to KSA for advice and he will act as a referee for KSA Group
If your recruitment company has similar problems why not call Sarah Thomson and ask for her advice. 01289 309431 or 0800 9700539.
Keith Steven the MD has written for the Recruiter Magazine -Read the article Serious Cashflow Problem? - All is not Lost!
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Categories: CVA, What is a CVA or Company voluntary arrangement?