Cleaning Contractor Struggling Due to Loss of Contract

The Challenge

A Dorset-based contract cleaning company with a turnover of approximately £227,000 was struggling with significant financial difficulties. The business was undercapitalised, had lost major contracts, and was over-reliant on low-margin work. These issues led to mounting debts, particularly with HMRC, which accounted for a staggering 87% of the company’s total unsecured debt of £100,000. The director also had a large overdrawn director’s loan account, which needed to be addressed. With creditors pressing for payment and a fundamental business model that was no longer viable, the company needed a comprehensive restructuring to survive. Despite the company’s financial struggles, the director had not provided any personal guarantees, which provided some protection from creditors.

The Solution

In August 2015, the company’s director contacted KSA, who was appointed to assist with a Company Voluntary Arrangement (CVA). The CVA was the core of a strategic plan to save the business. The company had already taken proactive steps to cut costs and overheads, and the director was confident that profitability could be achieved in a relatively short time. The CVA proposal offered a repayment of 54 pence in the £1 to unsecured creditors over five years. The plan also included a strategy to repay the director’s overdrawn loan account over the life of the CVA. When HMRC initially rejected the proposal due to concerns about poor compliance and historic arrears, the creditors’ meeting was adjourned for 14 days to allow KSA to respond to their concerns and suggest an amendment that included an increase in the dividend to 57p in the £1.

The Results

The CVA was ultimately accepted by the body of creditors at the adjourned meeting. The company successfully entered a CVA, which provided the legal framework it needed to continue trading and address its debts. The CVA’s approval saved all 15 jobs and allowed the company to implement its new marketing ventures to expand its market share and gain new business. The case demonstrates that even when facing a significant challenge from a major creditor like HMRC due to past compliance issues, a company with a viable business model can be rescued through a CVA. The willingness to negotiate and increase the proposed dividend proved to be a critical factor in gaining HMRC’s approval and securing the company’s future.