Restaurant and Catering Company Losing Money Following Leasehold Purchase

The Challenge

A company operating a restaurant and catering service was facing significant financial difficulties. Despite a turnover of £351,600 in 2013, the business incurred a loss of £38,500. The main problem was a loss sustained from the purchase of a leasehold public house in late 2011, which operated as a second restaurant. Although this pub accounted for about 50% of the company’s income, its high running costs were having a detrimental effect on the overall business, making it an unsustainable burden. The company had significant rent arrears on the premises, with 3.5 years remaining on the lease. The company had unsecured debt of £164,500, with HMRC accounting for a substantial 78% of that debt. The directors, both of whom had a history with a previous insolvency, were under pressure to find a solution to their cash flow problems and debt.

The Solution

In October 2013, one of the directors contacted RMT KSA, who was appointed to assist with a Company Voluntary Arrangement (CVA). Recognizing the unsustainable nature of the pub, the directors, in consultation with KSA, decided to vacate the premises in March 2014 and signed a lease surrender. This was a crucial step to eliminate the source of the business’s losses. The CVA proposal was designed to reflect this radical restructuring. The forecast for the first year of the CVA was a reduced turnover of £161,000, but with a projected net profit of £26,000, demonstrating the viability of the core business once the unprofitable pub was removed. The directors, as connected creditors, agreed to waive their claims to £50,000 in loans they had made to the company. The CVA proposed a dividend of 53p in the £1 to unsecured creditors.

The Results

The CVA was successfully approved at the creditors’ meeting in April 2014. The approval of the CVA provided the company with a formal and legal framework to restructure its finances and deal with the fallout from the unprofitable pub. The plan was a success in that it saved 15 jobs, with only four redundancies necessary, and provided a structured repayment plan for creditors. Although the directors had personal guarantees on the lease, the landlord had verbally agreed not to pursue them, which provided a significant relief. This case demonstrates how a CVA can be a powerful tool for a company to shed an unprofitable arm of its business, restructure its finances, and return to a viable and profitable position. The directors’ willingness to take radical action, combined with KSA’s expertise, was key to saving the core business and its employees.