Our client was incorporated in February 1977. However, the business, which has been passed on through the family started trading in the 1930s. The business initially traded as a painting and decorating business. Recently, the business diversified into the electrical and general construction sectors whilst concentrating on painting and decorating. The company employed approximately 32 staff, and covered most of the UK with respect to customers and was a member of a number of sector specific governing/licensing bodies e.g. NIC/EIC, FMB, CHAS and Corgi.
The company works for private individuals but the majority of the work is for commercial customers under JCT contracts.
The company encountered financial difficulties because of the costs incurred in the diversification of the business, in particular into the electrical contracting element of the business.
The financial status was difficult with trade creditors owed some £40k and HMRC £110k. No creditors had started legal action and Employees claims in insolvency would have amounted to c.£100,000. So making people redundant was unaffordable.
The business had an overdraft facility of £150k with RBS. This bank is well known for blocking pre-pack administrations where the business is sold to the same directors.
In addition if the company entered Administration, we believed that most of the JCT contracts would be determined, this could kill the business overnight. As most construction business people know, it is quite simple to determine a contract and state that no debts are owed to the subcontractor! Thus the administration would probably not return a dividend to creditors.
As a result of the problems the managing director contacted KSA Group having read about company voluntary arrangements. A director of KSA met up with the MD and the financial controller at their premises and we set out a rescue solution, costed and followed by a written report. This process is always free of charge for new clients.
It was our view that the business could be rescued but the company needed to reduce overheads the board felt this could be done by making a number of jobs redundant. In addition, the company's secured debt needed restructuring by introducing a factoring facility provider and/or remortgaging the company's premises in order to introduce some working capital. Under this restructuring, the company's overdraft probably would be removed, removing interest charges and reducing bank charges going forward.
After due consideration of other rescue alternatives; trading out, refinancing, or sale of the business, a Company Voluntary Arrangement (CVA) was deemed appropriate. After about 8 weeks a CVA proposal was put together and accepted by the creditors, where the company agreed to pay £1,000 per month with a profit ratchet built in to allow higher payments to creditors if the company made more profit than originally anticipated. Thus a dividend of 37p was proposed and agreed by 97% of creditors at the meeting.
If your building company has similar problems why not call Sarah Massey and ask for her advice. 01289 309431 or 0800 9700539.
Categories: CVA, What is a CVA or Company voluntary arrangement?