Southern Based Internet Retailer – CVA and IVA case studies

The director of the online retail company contacted Keith Steven of KSA to discuss the company’s present financial situation.  A meeting was then requested and held at the company’s premises between the directors and KSA regional manager, Hugh Gabriel.

KSA were appointed to assist the company with a Company Voluntary Arrangement (CVA) in January 2015. Turnover for the 2014 trading year was c£2.6m.

The company was encountering financial difficulties due to:

1. Undercapitalisation
2. excessive advertising/marketing costs that meant margins were much lower than expected
3. staff costs too high in a highly competitive environment.
4. The board identified these problems in mid 2014 and had reduced staff and costs to try and deal with the resultant cash flow pressures.

Premises

•  The company rents office and warehouse premises on a business park.

Employees

• The company employs 13 staff including the directors
• KSA assisted the directors with no redundancies, however one redundancy was made prior to KSA’s appointment.

Bank & Financial facilities

• The bank provides the company with current, deposit and foreign currency accounts with no overdraft facilities.
• The bank also provides the company with a £10k loan facility
• The bank is unsecured i.e. it does not have a legal charge or debenture over the company’s assets.
• Due to the large credit balance in the company’s bank account, it was proposed within the CVA the unsecured loan would not be bound into the CVA.  The directors believed that this would ultimately maximise the interests of the body of creditors by protecting the company’s cashflow because the bank would not then exercise its right of ‘set-off’
•  The company has several finance or asset based lending agreements. These would usually continue to be serviced by the company throughout the CVA until they reach full term. However, KSA assisted the directors to cancel two agreements using the CVA.

Directors

• The directors had provided various Personal Guarantees (P.G’s) to creditors in respect of the premises, financial facilities and assets based lending facilities
• The directors also had a substantial Overdrawn Directors’ Loan accounts (ODDLA).  NB: it is usually a modification (condition of acceptance) of HMRC  that balances of this nature are repaid within the first 6 – 12 months of the CVA being approved by the body of creditors.

Unsecured Creditor debt

•  £830K of which HMRC was 33%

Cost & overhead reduction

•  As detailed above certain measures had already been attempted to reduce payroll costs prior to KSA’s appointment.
• The directors changed the stocking policy to reduce stock days and implemented a rigid stock control protocol, which would ensure cash flow was not unnecessarily tied up.
• The directors have reduced the level of marketing spend which had been fairly unproductive and further reduced marketing costs by cancelling associated agreements.
• With new internal accounting processes, the directors will now have access to regular, accurate management information; which will be instrumental in spotting financial issues early.

It became apparent to the directors that they would not be in a position to repay the Overdrawn Directors’ Loan Account (ODLA) and balances which may crystallise as a result of certain creditors seeking to rely on personal guarantees from personal funds whilst also servicing their personal liabilities.

KSA was therefore further engaged to assist the directors to propose Individual Voluntary Arrangements (IVAs) which would provide additional contributions to the CVA against the ODLAs whilst addressing the shortfall on balances (which would crystallise under the personal guarantees).

One creditor served a statutory demand on the company with the threat of serving a Winding Up Petition as soon as the statutory demand had expired. Negotiations were held over a period of time ensuring the Winding Up Petition was not presented at court.

The nominee’s review was held in respect of both the CVA and the two IVAs. The CVA, IVAs and nominee’s reports were subsequently lodged at court.

Including the payments into the CVA via the directors IVAs, the CVA proposed 50p in £1 repayment to unsecured creditors over 6 years.

HMRC provided their response rejecting the CVA. All proxy votes received were in favour of the proposals however without HMRC approval, given their proportion of the creditor balance, the CVA could not be approved.

At the creditors meeting, it was discussed with those who attended that an appeal would be made to HMRC with the meeting would be adjourned for two weeks to permit a further response.

A further response was received from HMRC approving the CVA with modifications including a minimum 55p in £1. Further modifications were received from several creditors which increased the contributions by a further £400 per month within the CVA; these were accepted by the directors and the CVA and IVAs were unanimously approved at the adjourned creditors meeting.