Marketing Agency Hit By Fraud

The Challenge

A high-end advertising and marketing company with a turnover of approximately £1.4 million faced a severe and urgent cash flow crisis, not from a typical market downturn, but from a devastating fraud. Over a period of 9-10 months in 2010, an estimated £340,000 was stolen from the company. This fraud led to the accumulation of large liabilities, particularly with HMRC. The board identified this critical situation in late January 2011, recognizing that without immediate action, the company was in danger of collapse. The company had a total unsecured debt of £430,000, of which a significant 80% was owed to HMRC. The directors, who were not at personal risk due to a lack of personal guarantees, were under immense pressure to find a way to manage the debt and save the business.

The Solution

Referred by a former client, the company’s director contacted KSA, and the firm was appointed in February 2007 to assist with a Company Voluntary Arrangement (CVA). The CVA was chosen as the most suitable legal mechanism to restructure the company’s finances and deal with the fallout from the fraud. The first order of business was to identify the fraudulent transactions and rebuild the corrupted systems to prevent a recurrence. KSA also assisted the company in taking decisive actions to reduce overheads. A key part of the restructuring plan was to close a foreign office and use the CVA to legally terminate its lease, which was a strategic and cost-saving move. The CVA proposal offered to repay 34p in the £1 to unsecured creditors over five years, a plan designed to be acceptable to creditors while providing the company with the financial breathing room it needed to recover.

The Results

The CVA was successfully accepted by the body of creditors. HMRC, which was the largest unsecured creditor, approved the proposal, a critical step that assured its passage. The CVA’s approval provided a formal and legally binding framework for the company’s recovery. The company successfully closed its foreign office and, by using the CVA, was able to cancel the lease without a problem. The restructuring and the implementation of the CVA also meant that 16 jobs were saved, as the company only had to make one redundancy. By addressing the massive debt caused by the fraud and implementing new controls, the company was able to move forward on a solid financial footing. This case demonstrates the power of a CVA not only in dealing with traditional debt but also in providing a pathway to recovery after a significant and unexpected financial event like fraud.