Sector: Service Sector – Nursing Agency and Care Homes
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.
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.