Software Development Company Struggling Due to Rapid Growth and Undercapitalisation

The Challenge

A software development company with a turnover of approximately £684,000 faced significant financial difficulties despite a recent increase in sales. The core problem was that the company was undercapitalized due to rapid business growth, which it could not financially sustain. This led to large borrowings, including a significant £60,000 unsecured overdraft and a flexible loan of about £140,000. The company was also unable to keep up with its tax obligations, failing to adhere to a “Time To Pay” arrangement with HMRC. With total unsecured debt of £333,000, of which 60% was owed to HMRC, the business was under immense pressure. The directors were at personal risk due to personal guarantees on the unsecured bank loan, and HMRC had served a winding up petition, pushing the company to the brink of liquidation.

The Solution

In May 2011, the company appointed RMT KSA to assist with a Company Voluntary Arrangement (CVA). On RMT KSA’s recommendation, the company instructed legal representation to handle the winding up petition, successfully obtaining an **eight-week adjournment** to allow time for the CVA process. The directors also addressed a key issue by repaying very large overdrawn directors’ loan accounts, ensuring the CVA proposal was robust. The CVA proposed a repayment of 43 pence for every £1 to unsecured creditors over five years. Although HMRC, the largest unsecured creditor, rejected the CVA twice, KSA worked with the company to satisfy their concerns. This required a series of negotiations and modifications, which led to a two-week adjournment of the creditors’ meeting to finalize the terms.

The Results

After a protracted negotiation process, the CVA was finally approved by the body of creditors. This approval was a critical success, as it led to the **dismissal of the winding up petition** at the return hearing date, allowing the company to avoid immediate liquidation. The CVA enabled the company to continue trading and honor its debt in a structured manner. However, while the company initially adhered to the CVA contributions, it was ultimately unable to sustain itself. In June 2014, the directors placed the company into administration. While the long-term outcome was not successful for the company as an entity, the CVA provided a vital period of legal protection and a structured attempt at recovery. It offered a crucial opportunity for the business to stabilize and for the directors to explore all possible avenues before a final decision on its future was made.