Sector: Manufacturing – Office and School Furniture
Location: West Midlands
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.
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.