North East Building Business Faced Increased Costs

The Challenge

A long-established family business, trading since the 1930s as a painting and decorating company, faced significant financial problems due to a recent and costly diversification into electrical and general construction. This expansion, while a strategic move, led to a difficult financial situation. The company’s cash flow was strained, with trade creditors owed some £40,000 and HMRC owed £110,000. Additionally, making necessary redundancies was financially unfeasible, as employee claims in insolvency would have amounted to approximately £100,000. The company’s £150,000 overdraft facility with RBS presented another challenge, as the bank was known to block pre-pack administrations, a potential restructuring route. More critically, the company’s reliance on JCT contracts meant that a formal administration could cause these contracts to be terminated, likely killing the business outright and leaving no assets for creditors.

The Solution

The managing director, having learned about company voluntary arrangements (CVAs), contacted RMT KSA. Our team met with the directors and financial controller and devised a rescue solution. They identified that the business could be saved, but it required a significant restructuring of secured debt and a reduction in overheads. The proposed plan was to introduce a factoring facility or re-mortgage the company’s premises to inject working capital, which would in turn allow them to eliminate the overdraft and reduce ongoing bank charges. The board also agreed that they would need to make some redundancies to reduce staff costs. After considering other alternatives like refinancing or a sale, a Company Voluntary Arrangement (CVA) was determined to be the most appropriate tool. After eight weeks of preparation, a CVA proposal was put forward to creditors.

The Results

The CVA proposal was a resounding success, being accepted by a remarkable 97% of creditors at the meeting. The company agreed to pay a fixed amount of £1,000 per month, with a profit ratchet included to increase payments if the company’s profitability improved. This structure resulted in a proposed and agreed-upon dividend of 37p in the £1. The CVA provided a formal, legal framework that allowed the company to restructure its finances, manage its debts, and avoid liquidation. This outcome saved the business and its legacy, while also providing a better return for creditors than a potential liquidation would have offered. It stands as a powerful example of how a CVA can be a flexible and effective solution for a company facing complex legal and financial challenges, particularly in the construction sector where contract continuity is vital.