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The directors were referred to KSA Group via LexLaw following the issue of a winding up petition (WUP) by a trade creditor for over £180,000.
Having tried for some time to negotiate with the creditor, the directors didn't think anything as serious as a winding up petition would result.
Even when the petition was received they failed to act, it was not until the creditor took the next step and advertised the winding up petition did they contact specialists like LexLaw to get help.
What they hadn't realised is the advertisement of the winding up petition is a public event and the bank froze the trading bank accounts within 24 hours. Thus the company COULD NOT TRADE.
See a guide to the winding up petition here.
Indeed once a petition is issued the directors begin to lose control of the company they are supposed to direct! Did you know that once a winding up petition has been served on the company the board may not;
- Sell any of the assets or
- Propose a creditors voluntary liquidation and
- Cannot appoint an administrator without an expensive Court application.
LexLaw led negotiations commenced with the petitioning creditor and another creditor with large debt and successfully obtained agreement in writing from both that they would support a well structured company voluntary arrangement CVA. Both aggressive creditors stated they felt that the directors were like ostriches, failing to act is failure to manage. BUT there was and is a sound business there. So the CVA was deemed acceptable provided the directors did something.
However, to unfreeze the bank account the bank required a validation order. See a guide to validation orders here
KSA Group's crash team prepared a fast CVA draft, detailed financial forecasts and the obligatory statement of affairs. This was then used by LexLaw in support of a full Validation order. This Order when granted by the High Court allowing the bank to reopen the bank account.
It is Lexlaw's experience that a Validation Order will not be granted in the High Court without a quality draft CVA proposal.
Case salient facts:
HMRC debt £307k (£199k PAYE/NIC £108k VAT)
Petitioning creditor £372k
CVA proposed in 2 weeks
Proposed dividend for creditors, which is the amount the creditors will get back if the CVA works , 55p in £1.
The directors now have control back over the company and the bank accounts. All creditors voted in favour of 55p in £1 as the likely liquidation recovery was under 4p.
The moral of this case study is ACT BEFORE YOUR AGGRESSIVE CREDITORS. With £679k of liabilities, the directors thought they could trade out; they couldn't.
The cost of the Validation Order and the very fast CVA was not insubstantial. Had the directors got KSA involved when the aggressive legal letters came in, then a lot of the cost would not have been incurred.