fd centre may 2011 ksa110504

A Lifeline for Business

KSA Group

FD Centre Seminar The Oxfordshire Golf Club

May 11th 2011What are Company Voluntary Arrangements?


CVA: the Best Recovery tool?

• Why don't CVA’s get used?• Government wants Company Rescue mechanisms to be used – CVA and Administration

• But

www.companyrescue.co.uk


The Statistics Don’t Lie!

2005 2006 2007 2008 2009 20100

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Insolvency procedure by type

AdminsWound upCVLCVA

No

Com

pani

es


Time to Act?

• When should directors get help?



When would directors seek help?

31% - Overdraft reaching “uncomfortable level”

6% - Overdraft limit exceeded

35% - Difficulty paying suppliers on time

23% - Difficulty in paying employees as well as suppliers

5% - Upon receipt of threats of legal action or a County Court Judgment

Yes one in four would not get help until they cannot pay wages / suppliers!



Insolvency Warnings Signs

• A seminar on its own!– Cashflow, creditor problems, bank worries etc

• Ask have they had one or more of these?• CCS – summons or a CCJ – judgment• Warrant• Distraint & walking possession • Statutory demand• Winding up petition • Investigating accountant• Do the directors know what they mean? • Ok test time! Do you?



Insolvent or not?

• “We are not insolvent BUT”…..• Ok what are the insolvency tests?• Cash flow test (s123 (1)(e) Insolvency Act 1986• Balance sheet test• Legal actions test - > £750• If breaches any test – the company is in fact insolvent

– Legally directors must act in the best interest of creditors• If you know your facts then they cannot argue



Assess management

• They need to change or be changed!– What do you think of the directors/ managers?– Are they honest, determined and hard working?– If they are not worried, why not?

• Do they accept blame and want to get on with solutions?– Great so do we!

• If they don’t….



So what is a CVA?

• Flexible deal structure– Pay “X” pence in £1 over “Y” period to be agreed

• Control – directors remains in control• Control – creditors are controlled by the process• Time – defined period to conclude the deal• Cost Effective • Terminate unwanted leases, contracts and staff

– More later• Flexible and powerful



5 Key Requirements for a CVA

• Not highly technical !• Established marketplace / niche within that marketplace

• Potential to recover, grow and prosper given finance and management needed

• Systems or management fundamentally in place or easily implemented

• Management needs determination to succeed• Directors are prepared to accept change



CVA Clients

• Those we think suitable CVA prospects?• Manufacturing, engineering – “making” companies• Service based businesses• Recruitment, security, software • We can CVA CIC, Limited By Guarantee and LLP’s

• Those we do not • Start-ups – unless looking to acquire or VC backed• Pure property development (although always check)



Part 1 Insolvency Act 1986

• I use these words to describe CVA to targets– Very loose framework of sections and rules– That set out the basics of the CVA– Non prescriptive - offer a deal to company creditors– Suggest a blank sheet of paper to start the process

• Providing fit, fair and feasible and• If 75% creditors by value agree• You have a deal that is legally binding

– Compromises creditors debts– Moratorium protects the company when approved



CVA Case Law

• These are vital Appeal Court cases• Doorbar v Alltime Securities• Park Air Services • Newlands Seaford (Educational) Trust• Re Dollar Land, more of this later• Thomas v Ken Thomas Ltd

– One of our cases!– Appropriation of payments of rent pre CVA v Forfeiture



How will a CVA terminate a contract?

• Why is a CVA so powerful? CREDITORS!• IA 86 & case law allows for a voluntary arrangement to

compromise a creditors debts– Unsecured tax or trade is easy to understand

• Contingent creditors or unascertained creditors are in essence “future creditors”

• Therefore a CVA can bind them – Case law was needed to prove this– Doorbar v Alltime Security perhaps the most important case law of them all for CVA’s



Doorbar v Alltime Security (1994) BCC 994)

• The Court of Appeal dismissed appeals by Alltime from two decisions of Knox J in which he held that a debtor's future liability under a lease was included in an individual voluntary arrangement and that there was no unfair prejudice or material irregularity in approval of the arrangement

• Thus “unascertained” or future creditors can be bound by CVA– It is important to note that in Re Cancol Ltd (1995) the ability to include future rent extends to CVAs as well as IVAs.

• Therefore applies to all contracts in essencewww.companyrescue.co.uk


CVA Technical Guide

• How do we value the future debt then?• Value the rent and void period• Get a surveyors opinion on how long to re-let and at what rack rental

• Typically allow 12 months rent and £1 for dilapidations– Dilapidations is valued at £1 as no loss incurred yet– RE: Newlands (Seaford) Educational Trust



Winding Up Petitions

• Winding up petitions can still be advertised and this may lead to freezing of the bank account. Why?– S127 IA86 - disposition of assets

• What if creditor petitions despite “Dollar Land” case law?– Case stated a winding up order be rescinded if CVA likely to be

approved• KSA persuades plaintiff to give undertaking not to advertise, or if we can’t

– Take out an injunction to prevent it – Get the CVA proposed as quickly as possible

• Petitioner must advertise 7 days before the hearing• So need CVA approved or seek adjournment of the hearing• HMRC WILL ADJOURN PETITION IF CVA PROPOSED



What does the taxman think?

• We have a strong relationship with • Combined Voluntary Arrangement Service (VAS)

– based in Worthing• Many tax collection teams across the UK know us and CVA’s

– They collect and use field officers, CCJ’s and distraint• Enforcement & Insolvency Dept know who we are

• Also based in Worthing

– Enforcement & Insolvency is typically one step from a WUP– They issue 7 day warnings after failed TTP’s– Would prefer a CVA to nil collection but wont wait for ever



Administration versus CVA

• The big issues are– Directors not in control after admin– They or third party others have to buy the assets– Statutory conduct investigation– Marketing damage– Damaging to asset values– “Stiffing” of creditors

• Pre-packs under attack now – SIP 16– Still a powerful tool but numbers falling



CVA Summary

• The company voluntary arrangement tool is– Flexible– Powerful– Kill contracts, leases and costs

• Done properly allows a deep restructure of the client’s business

• Not a panacea• Change needed



CVA Hive Down

• The Hive Down?• Quick example• Why Hive Down?

– Construction– Public sector– Bank’s cost of capital



CVA Objections, Mistruths!

• “I want a CVA but my biggest supplier will stop supplying me, what will you do to stop this”?

• “No one will supply me after a CVA”? • “Why didn't my accountant tell me about it”?!• “I’ve heard CVA’s are always rejected by HMRC”?• I have a 6 month TTP with HMRC why would they now accept 40p in £1 over 5 years?

• “CVA’s must pay back 100p in £1 or HMRC reject”.• “The bank will appoint a receiver”!



A Real Life CVA Case Study

• We shall call it ABC Retailer Ltd• Designer and retailer of high end furniture and fashion items

• London based• Warehouse, 7 stores, Web Sales• Lost £450,000pa 2008-9, same again 2009-10• Blamed stock and warehouse problems


CVA Case Study

• What we proposed• CVA led restructure strategy

– Contains creditor pressure, KSA control HMRC and trade creditors daily: sharply improves cashflow

– Leverage c £120,000 pm from HMRC in preparatory period– Sharply reduce risk for RBS

• Bank loans continue or may need to increase loan term• Repay Lombard facilities over time as per contract• Trade out orders taken & cash held to mitigate claw backs on Streamline

– Refocus directors on running the business (not firefighting)– Board remains in control and shareholder’s loan not written off


CVA Case Study

• Hold aggressive retail sales– In closing and retained stores, warehouse and online– Drive cashflow into the business– Converts current asset of stock into cash– Get rid of poor stock

• Close marginal stores, reduce headcount with nil or modest cash cost– Doorbar v Alltime Securities case law to determine FOUR unwanted

shop leases– Protect mail order, web and well performing stores– Make retail staff redundant immediately– Use RPO to meet claims


CVA Case Study

• KSA to assist with redundancy process• Redundancy Payments Office (DEBIS) meets redundancy and lieu of notice claims of the leaving employees

• Nil cash cost for company– Sharply reduce fixed costs and overheads

• Plan to close warehouse operation • Outsource warehouse and fulfillment processes• Net saving over fixed rent cost £300,000 pa


CVA Case Study

• Shop closure reduces fixed costs & overheads of £800k pa

• Total direct costs reduced by £1.265m• Overheads reduced by £967k• Fifty FT jobs, lost 20 PT • Sales will be £5m year one


CVA Case Study

• KSA recommended that Mrs A stand down as MD• Son took over• Introduced new non executive director, 3 old NED’s were removed

• New operations director appointed


CVA Case Study

• Half way through the CVA process a winding up petition was served!

• Plaintiff refused to stay advertisement in– London Gazette

• Aggressive legal action required to defend company– If advertised what would happen to the bank account?

• Stewarts Law LLP helped with injunction to prevent advertisement


CVA Case Study

• KSA work? What do WE do?• SOFA – statement of affairs• Narrative – history, change, deal structure• Detailed Financial forecasts with P&L, Balance Sheet and cashflow for 60 months– FD Centre assist us on many models!

• Controlled creditors actions – by talking to them• Dealt with petition• Prepared the CVA and led the restructure• Advised on redundancies; HR1, RP1 and RPO issues


CVA Case Study

• Ok what is HR1?– If over 25 people losing jobs in one site, must inform DeBIS

• What is RPO?– Redundancy payments office

• What is an RP1 form?– Ex employees claim form to RPO


CVA Case Study

• KSA discussed position with Global Restructuring Group (NatWest) and manager

• Bank supportive but wanted overdraft repaid• Lombard asset finance facility to be paid in full, (obtained capital holiday)

• Crucially Streamline facility continued– Risk of huge refunds if closed the company

• £1.5m of unsecured creditors will receive 30p in £1• HMRC was owed £491k – voted in favour


CVA Experts

• Spotting CVA cases• Please pass us any sightings!• If you want support and training we can provide this• Please pass on the CVA message and • We will happily give colleagues training• KSA’s standard modus operandi

– Free meetings, assessment of options– Set a rescue strategy and then issue written– SOLUTIONS REPORT for your struggling clients


CVA Summary

• Well time to close now• Any questions?


fd centre may 2011 ksa110504

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