Signage Company With Falling Sales

The Challenge

A company in the signage and brand image sector, with a turnover of approximately £560,000 in 2009, was experiencing significant financial distress. The primary issues were a sharp drop in sales over the past four years, largely due to the recession, and a reduced factoring facility, which was cut from 75% to under 50%. The managing director’s high salary and drawings also contributed to the cash flow problems. This situation led to a build-up of tax arrears, with HMRC actively pursuing the company for these liabilities. With total unsecured debt of £315,000, of which a significant 78% was owed to HMRC, the business was in a precarious position. The director also had an overdrawn director’s loan account of approximately £60,000, and had provided personal guarantees to the bank, placing him at personal financial risk.

The Solution

In June 2010, an employee contacted KSA, and the company appointed them to assist with a Company Voluntary Arrangement (CVA). To address the company’s financial issues, KSA assisted the director in making two redundancies to cut costs, which was a direct response to the reduced workload. As part of the CVA proposal, the director agreed to repay the £60,000 overdrawn loan account, with those funds being used as additional contributions for the benefit of creditors. The CVA proposed a repayment of 46 pence for every £1 to unsecured creditors over five years. The company also had an ongoing tribunal claim, which the CVA could potentially incorporate and manage. The director was confident that these cost-cutting measures would enable the company to return to profitability relatively quickly.

The Results

The CVA was a complete success. HMRC reviewed the proposal and accepted it, paving the way for the CVA to be approved by the entire body of creditors at a meeting in January 2011. The CVA provided a structured, legal framework for the company to manage its significant unsecured debt and continue trading. The company has successfully navigated the CVA process and, according to the case study, was in its fifth year of the arrangement, having just completed its fourth annual distribution to creditors. The CVA saved the jobs of 12 employees and allowed the business to recover and stabilize, proving that a CVA can be an effective tool for a company with a viable business model to survive a severe market downturn.