Archives: Case Studies
Sector: Service Sector – Mobile Communication Installation
Size: SME
Turnover: £2 million
Staff: 20 Staff
Debts: £560,000
Problem: HMRC Debt £120,000 plus personal guarantees to the bank of £60,000
Date: June 2011
Solution: Pre Pack Administration
In June 2011, the directors of a mobile communication technology company held a meeting with their bank. Following that meeting the bank called in the secured overdraft of £60,0000, resulting in no funds to make payroll that month. The directors contacted 4R Business Recovery.
We arranged to meet both the directors that day and within 2 hours we had started our fact find. The company was operated by very competent and commercially savvy directors, who had already identified the problems with the current business model. The business could and should have been profitable, but was suffering losses and cash flow outflows as a result of one contract with, what at the time was, the company’s largest customer.
It was a typical case of sales vanity and profit insanity. The customer had approached them with the lure of large sales volumes, but both the contract and the business relationship was such that invoices were constantly disputed, discounts taken, credit notes sought and payments delayed.
The directors understood fully they needed to cancel this damaging contract or, at the very least, renegotiate the contract with their largest customer. But suffering cash flow pressure they simply could not afford to take that very brave step. In addition, they had financed some bespoke software, the software house had gone into liquidation, and the software was all but useless, but the expensive finance still had to be repaid.
The business needed to both reposition itself in the market place and restructure its cost base, including premises and employees. Given the need to cancel the contract with the company’s largest customer, the business was uncertain if sufficient cash flow could be generated to repay any of the debts, which precluded a CVA in this case.
In discussion with the directors, it became clear that they had an appetite to carry on and re-employ the staff. They could secure additional funding, but this would only be introduced into a new company that had none of the historic debt problems of the current limited company. Therefore 4R Business Recovery proposed a Pre Pack Administration. This offered the best value for all the stakeholders, including the bank, the employees, customers, trade suppliers and HMRC.
Solution
We immediately contacted the bank and negotiated an extension of the overdraft facility based on a proposed Pre Pack Administration and sale of assets to clear the secured lender. This funding was to pay immediate salaries of employees. The company’s assets were independently valued, and a contract of sales was drawn up. A notice of intention to file an administrator was filed in court to provide a legal moratorium to protect the company.
The new company was set up and third party funding introduced. The old company was placed into liquidation and its assets, contracts, goodwill, and intellectual property rights immediately sold to the new company. In line with best practice, the Insolvency Practitioner pre-marketed the sale of the business, both nationally and to specialist market sectors, and no interest from other parties was forthcoming.
The new company did not take on the old premises of finance lease or the disputed software finance. It was able, as part of the process, to restructure its cost base and employees and move forward. The bank was paid in full with other creditors receiving a dividend.
Following 4R Business Recovery’s intervention, the company within six months, by refocusing its energies and restructuring, was able to achieve spectacular results. It doubled sales, moved into two new business niches, repaid its funding and accumulated cash reserves of over £200,000. By moving from fire fighting debt issues, it was able to engage with a positive environment based on wealth creation.
Remember when confronting the issues the insolvency laws are designed to protect creditors but also allow enterprises and businesses to flourish.
Sector: Manufacturing – Double Glazing Manufacture and Installation
Size: SME
Turnover: £400,000
Staff: 4 employees
Debts: £95,000
Problem: Winding Up Petition from HMRC debts of £66,000
Date: March 2012
“4R helped us through every stage of the process, we took responsibility for the problems and the failure to manage them. But, to be frank, we learned a huge amount from the whole team at 4R, and these lessons will help ensure we do not get into this situation again.”
In March 2012, one of the two directors of the company contacted 4R Business Recovery as that morning he had received a threat of a Winding Up Petition from HMRC.
4R Business Recovery arranged to meet both directors and shareholders the following day to conduct a business review and discuss rescue, recovery and turnaround options.
The company manufactured double glazed window and door units. Following on from the credit crunch in 2008, the company gradually lost sales momentum, and cash flow suffered. The business, although profitable, required high levels of working capital for raw materials.
As sales and profits reduced to break even it only needed one bad debt to seriously affect cash flow. The directors admitted that the companies accounting system was reactive, with the financial health of the company only really assessed annually, and as a result, the directors were unaware of working capital demands and how this affected solvency.
Unwisely the directors had failed to pay VAT returns as they fell due, using cash for raw materials and wages, to try to trade out of the predicament. In addition, we pointed out that the directors had an overdrawn director’s loan account outstanding.
Unknown to them their accountant had put drawings and unreconciled expenses against a loan account which would need to be repaid if the company failed.
Solution
Creditors Voluntary Liquidation with buyback of assets and goodwill from the liquidation of the old company.
4R Business Recovery identified that the current company was insolvent. While opportunities for reducing costs and stabilising cash flow existed, and therefore a Company Voluntary Arrangement (CVA) was possible, the directors wanted to close and liquidate the limited company.
A CVA was possible, but it is important to remember that a CVA requires a real commitment from the directors, and in this case, this was not possible. A Creditors Voluntary Liquidation was proposed, the company was closed legally and the assets liquidated for the benefit of the company’s creditors.
The directors, who were also the shareholders, agreed that the business could only support one of them as an employee. As a result one of the exiting directors bought the assets and stock from the liquidator for the ‘market price’. He started up a new limited company, of which he was now the sole director and shareholder, a so-called Phoenix Company.
Post Liquidation
The remaining director wanted to trade using a similar name as the original company, as this is prohibited under Section 216 of the insolvency Act, we made an application on his behalf, in line with legal requirements of the Act, for the use of the name on behalf of the director. This was granted.
Each director had an outstanding loan account. We negotiated a very favourable settlement of the outstanding loans with the liquidator of the old company.
When a company fails owing money to HMRC the case is automatically referred to the Insolvency Service by a mechanism called a D Report or notice. This can result in the Insolvency Service undertaking a review of the director’s conduct. In this case, 4R Business Recovery represented the directors as part of their ongoing investigation and no further action was taken.
Sector: Service Sector – Nursing Agency and Care Homes
Size: SME
Turnover: £3million
Staff: 30 Staff
Debts: £3.5 million-plus
Problem: HMRC Debt
Date: Sept 2011
Solution: Company Voluntary Arrangement
In May 2011 a chartered accountant acting for his newly acquired client, a director of a Nursing Agency and Care Home provider, contacted 4R Business Recovery. Following exhaustive discussions, HMRC had confirmed, that morning, their intention of issuing a Winding Up Petition against his client.
4R Business Recovery arranged to meet both, the accountant and the director, after hours as the director was concerned staff would find out about the position the company faced.
The company provided specialist medical staff to both the NHS, private hospitals and nursing homes, and operated a number of specialist care homes. Despite having a very successful business, both profitable and cash positive, the director had failed to pay any VAT, Corporation Tax, and PAYE for over three years. Citing a failure of various accountants to manage the problem and a lack of understanding of the need to comply with tax law and the duties of a director. Furthermore, the company had recently cancelled a commercial funding arrangement, based on sales invoice factoring, and had used HMRC cash to fund the buyback of the sales ledger.
4R Business Recovery conducted a business review, discussed rescue, recovery and turnaround options. Whilst doing so we discovered over £3.4M owed in tax revenues to HMRC and an overdrawn director’s loan account of over £1M.
The business was very successful and generated good cash flow and profits. We emphasised to the director the risks taken in drawing funds from the business at the expense of creditors, and that fundamental changes were needed to the management of the company. We explained the likely consequences, for the directors personally and the company, if the company was subject to a Winding Up Order.
However, as a service business, the company balance sheet had very little in the way of physical assets and stock or work in progress. Therefore we believed that it was in the best interests of creditors that the company be allowed to continue to trade and pay back its debts using a Company Voluntary Arrangement. A CVA would also enable the director to reduce or settle the loan account over time.
Solution
4R Business Recovery prepared detailed sales, profit and cash flow forecasts for the business. This demonstrated that future profits could repay a substantial amount of the debt. In a sustainable manner, over five years, the total debt would need to be reduced by over £1M. We, therefore, proposed to creditors, and principally to HMRC, that over £1M would need to be discounted or written off, but that over £2M could be returned to creditors over five years if the Company Voluntary Arrangement was approved, and the company allowed to continue to trade.
We were concerned about the lack of compliance from HMRC’s perspective and the director’s conduct, as clearly HMRC’s support was critical to a successful CVA outcome as they would have the majority vote. However, given a strong and well written CVA proposal and a full explanation of why it should be supported, we believed we could gain HMRC’s support for the proposal.
The proposal was circulated to all creditors and HMRC voted to support the CVA in September 2011. The business continued to trade with a new perspective and focus on tax compliance and disciplines regarding directors drawings and dividends. To date, the business remains a success and with lessons learned ensures it is fully compliant.
Sector: Service Sector – French Restaurant and Patisserie
Size: SME
Turnover: £2million
Staff: 20 Staff
Debts: £165,000
Problem: HMRC Invigilation following disclosure with demand for back assessment of £98,000
Date: March 2012
Solution: Company Voluntary Arrangement
“We had taken, what at the time, seemed the easier road to try and stay competitive and maintain cash flows.
“Under-reporting VAT seemed to be the easiest option at the time. But once we were notified of the audit, and thought through the consequences, we panicked. I thought I would be prosecuted by HMRC for fraud.
“I am very grateful for the support from 4R. For giving us the courage to come clean, disclose the debt, and then arranging a CVA to manage the process.”
In March 2012 the bookkeeper and accountant of a French Restaurant and Patisserie contacted 4R Business Recovery to assist the directors with a proposed invigilation visit by HMRC.
Following the downturn in the economy in 2008, the director, in an attempt to compete on the high street, lowered prices and compensated for the loss of income by diverting cash payments through a separate till. Instigating phantom EPOS systems to deliberately under-report the VAT due to HMRC.
The directors had falsified VAT returns and significantly under-reported VAT debts owed to HMRC. With an invigilation audit due in the next 10 days, the directors were aware that the EPOS system could potentially reveal the fraud and now wanted to understand how the problem could be managed.
Given the serious nature of the problem and the urgency of the audit date, 4R Business Recovery arranged to meet the director and his wife the following day. The first meeting lasted some 4 hours as we completed a full fact-find. The next day we arranged for a trusted partner, 360 Finance (a specialist in VAT audits and compliance), to undertake a full compliance audit. 360 Finance identified the deficit accurately at £98,000 in total.
We produced a full disclosure document, using HMRC’s own “Code of Practice 9”, and the Contractual Disclosure Facility or CDF protocols. We negotiated unprompted disclosure and reported to HMRC the under-reported VAT debts, which would now be subject to civil debt recovery action. By encouraging the directors to be open and transparent, criminal proceedings were avoided.
It was fortunate that the directors did disclose, as HMRC had already obtained covert evidence of cash being handled through specific tills and general sales activity. The invigilation audit would have uncovered the fraudulent practices, but as an undisclosed fraud, the director would have faced criminal prosecution.
4R Business Recovery was able to demonstrate the company was viable, that the directors had over 30 years track record of good tax compliance and that the enterprise had generated significant revenues for the exchequer. The tax fraud was a result of extreme commercial pressure on the directors, who openly admitted poor judgment, which was completely out of character as demonstrated over the last 30 years. As such HMRC would consider a Company Voluntary Arrangement or CVA to manage the debt owed.
Solution
4R Business Recovery completed a full CVA proposal with profit, loss and cash flow forecasts. Again, a well-written proposal with supporting evidence is critical when a company has “non-standard” compliance issues.
As a result of the recent disclosure agreement or CDF the proposal offered creditors repayment of 100p in the pound, this was accepted by HMRC and the other creditors.
Sector: Manufacturing – Office and School Furniture
Location: West Midlands
Turnover: £2M
Employees: 20
Debt: £500,000
Date: March 2012
Solution: Company Voluntary Arrangement
The company manufactured school and office furniture, and imported products and components in bulk from China. They operated a 10,000 s.q. foot warehouse and office in the West Midlands and employed 20 staff.
Despite a thriving order list, funding from invoice discounting to support cash flow, and the offer of a secured business loan, the business was struggling to pay its debts. Large containers of product sourced from China needed funding upfront and tied up cash for up to 8 weeks.
A number of bad debts started to restrict cash flow, and as a result, HMRC trade supply debts started to accumulate. Cash flow was put under further pressure as suppliers required pro forma payments to enable stock to be sourced and produced to ship customer orders.
The rent payments had recently fallen into arrears, the landlord had taken distraint (walking possession) against stock in the warehouse, and demanded payment in full. Despite making part payments to bailiffs, the walking possession was rolled forward to keep the stock value under the control of the landlord.
The directors were aware that prioritising payments to creditors that threatened the business with legal action or walking possession was unsustainable, moreover risking accusations of wrongful trading. Finally, HMRC issued a Winding Up Petition and their commercial funders had stopped further advances. They had an offer of a further loan to be secured against their home. As a result, the directors called 4R Business Recovery for further advice.
Given that the landlord had taken walking possession of all the stock and assets of the company, 4R Business Recovery arranged to meet the directors the following day.
Solution
In our opinion taking further loan advances would not secure the businesses future, but would put their home at risk. Our advice was to seek a CVA and 4R Business Recovery immediately met with the landlord to allow for a full commercial review. Our ability, within the CVA, to terminate the lease and limit exposure to dilapidation’s focused the landlord’s mind, they agreed a commercial settlement and the distraint was terminated.
Once we had secured the landlord’s support, we needed to discuss the situation with the company’s commercial funders. They were not willing to keep a facility in place if the company was to enter a CVA. Using our network partner, ‘The Finance Centre’, we arranged new commercial finance from funders who were fully briefed and supportive. 4R Business Recovery completed a full CVA proposal with profit, loss and cash flow forecasts.
Again, a well-written proposal, with supporting evidence is critical when creditors, such as banks or landlords, have taken distraint against a companies assets, or have the ability to nominate administrators or insolvency practitioners. In this case, the landlord needed to understand the commercial reality of the situation – they made the choice to keep our client as a tenant within the CVA.
Coming soon…