Sector: Service Sector – Mobile Communication Installation
Turnover: £2 million
Staff: 20 Staff
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.
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.