ksa group partnership r3 2009

A Lifeline for Business

R3 Partnership Insolvency

Company Voluntary Arrangements forLimited Liability Partnerships

Keith StevenTurnaround Practitioner

Managing Director KSA Group Ltd


Case Study Introduction

• “War story” on one of the first CVA’s for a LLP• Background to the case• Business is a South East law firm

– Expanded into property sales through 5 Estate Agencies & built conveyancing machine

– Acquired 2 other law firms to dilute property emphasis– Invested in centralised systems and management

• Funded by bank debt and ABL debt• (Asset based lending)

– Heavily geared, out of cash

www.companyrescue.co.uk


Business Background

• LLP had grown from £3m to £5m p.a. late 2007– Credit crunch hammered property sales 2008– Built up losses and legacy debts– HMRC started losing patience (de facto bank!)– Management failings– Sales fell more rapidly than costs

• Bank asked for an independent business review– £1.7m exposure on mortgage, overdraft, loans and asset

based lending– Facilities maxed out, returned items



Business Structure

• Why was this a limited liability partnership (LLP)?– Planned succession from senior team– Modern progressive approach, tax efficient– Business plan to grow to £10m sales, seek exit event– Global events stymied this and led to insolvency

• Remember senior parties are “Designated Members” not partners in partnership

• Effectively same insolvency options as a Ltd Liability company



IBR Findings

• Independent business review general findings– Insolvent business but viable if

• Costs cut, debt restructured and management supported

• Pre-pack or administration options for restructure limited by – Solicitors Regulation Authority (SRA)– High secured lending– Over staffed (TUPE)– Needed to cut fixed costs quickly and reduce overheads



Administration and SRA

• Solicitors Regulation Authority (if administration used)– Upon appointment, expect SRA immediate intervention,

removal of files and trust accounts– SRA could effect rapid restructure of business to more

robust law firm• What would be administration outcome for the bank?

– SRA ranks ahead of secured lender’s fixed and floating charges– Asset value collapse debtors, WIP and goodwill disappear– Property fixed charge could possibly repay bank mortgage, but– Bank would see significant shortfall on rest of debts (>80%)– NB: designated members had £650k PG’s secured on homes



Administration and Creditors

• Our estimated SOFA showed – Preferential creditors paid in full– 3% “prescribed part” recovery for trade and tax– Deficiency of £2.8m overall

• HMRC aggressive due to compliance issues– Failed Time to pay Deals– Threat of winding up petition (WUP)

• Trade creditors (60) mounting pressure



Options Available?

• Refinance - credit crunch = X• Trade sale – no time for due diligence, high gearing

and creditor threats = X• Administration / pre pack = X (SRA issues)• Liquidation = ?• Administration followed by CVA = X• CVA or company voluntary arrangement



Decision Time

• Bank did not want to appoint– Bank’s advisors agreed that CVA sensible option– LLP, advisors & bank could not reach agreement

• KSA group asked to set out strategy by LLP– Initial meetings followed by detailed solutions report– Waiting for decision.....

• THEN SOMETHING HAPPENED!– HMRC winding up petition issued 23rd July 2008 but then – “Served” on 11th August 2008



Decision Time

• Clock now started ticking to a hearing in late September 2008

• KSA appointed to lead CVA restructure on 14th August 2009– With statutory notice 3 weeks to build deal

• KSA persuaded HMRC to stay petition advert– Request to adjourn hearing denied– Creditors meeting had to be held pre-hearing



KSA CVA’s• Company Voluntary Arrangement - KSA approach

– High levels of due diligence– Compare all options and assess viability– Build detailed statement of affairs– Build very detailed financial models

• Using KSA’s bespoke 35mb CVA modelling tool– “What if“ scenario planning– Set out strategies to LLP, bank and advisors– Agree deal and then take to creditors

• Typically 4-5 weeks plus statutory notice period • Say 7-9 weeks overall



No time to waste

• BUT. This was a new process for KSA!– Company voluntary arrangement for a LLP not – Partnership voluntary arrangement– Or bog standard company VA

• CVA has huge flexibility and power– So we set to work & built a rescue deal structure

• SRA agreed not necessary to intervene in CVA– Kept watching brief



Typical PVA Structure?



HMRC Action

• Having issued petition, VAT would not stay action• KSA contacted VAS (Voluntary Arrangement Service)

– VAS not happy with firm’s poor compliance BUT– VAS agreed to listen, review PVA & linked IVA’s from

partners!!

• KSA explained not a PVA but CVA• No IVA’s from partners as designated members and

• Limited liability

• HMRC agreed not to advertise petitionwww.companyrescue.co.uk


CVA Technical issues (LLP only)

• Not a company = no corporation tax– Designated members taxed similarly to partners– Our model could not cope with that!– Self assessment complex to model in business scenario

• s214A IA 1986: Adjustment of withdrawals– Similar impact to wrongful reading action v directors– 214A, entitled "Adjustment of withdrawals", to enable a court to order a

member to make a contribution if he made withdrawals when he knew or had reasonable grounds for believing that the LLP was or would thereby become insolvent, subject to a defence of there having been objectively a reasonable prospect at that time that the LLP would avoid insolvency.



CVA Deal Structure?• KSA standard - 50% of future net profits into scheme

– How to calculate profits (re partners losses and gains)?• Five year phased deal with monthly contributions• £1.116m of eligible CVA creditors

– Offered to pay £4k pm in year 1– Total £852k contributions in 60 months– Proposed CVA dividend of 71p in £1

• Bank loans frozen for 12 months (interest only)• 2 Estate agencies closed• Total staff cut by c25



CVA Deal Structure (cont.)

• Introduction of non exec finance director (FCA)– Improved financial and management reporting– Refer to Steve Billot – lawyers often not great at this!

• KSA has joint approach with The FD Centre Ltd– Highly experienced quality business oriented CA’s

• Determined various unwanted lease / HP deals• Standstill agreement on wanted lease/ HP deals• Bank overdraft continued



Benefits for bank?

• No SRA intervention in pre -pack• No asset meltdown &crystallisation of loss in

administration• No loss of securities or remedies• Improved financial reporting obligatory (FCA)• Supervisor to oversee CVA• Reduction in bank management time• CVA brought end to “circ” – deal has to be done• HMRC Petition withdrawn



Benefits for creditors?

• Trade creditors to get dividend plus ongoing trading on cash terms

• Retain a future customer• Supervisor oversees CVA contractual obligations• Business must pay future taxes on time

– Mitigates costs to state of benefits, redundancy costs

• HMRC must get on time payments in future



Benefits for LLP Members?

• Still managing the business• Continue as solicitors, NO IVA’s!• Offset recent losses against previous gains under self

assessment• No PG call up, no loss of homes• Remain in control with tighter management &

reporting controls• Steadily trade out of troubled waters• Repay creditors who had faith in them



CVA for LLP Summary

• CVA’s are powerful consensual solutions for LLP’s• Avoid meltdown, intervention by SRA (for lawyers)• Avoid loss crystallisation for charge holders• Restructure business aggressively, remove fixed,

overhead and people costs• Cost effective process v administration

– In this case sub £50k for total restructure



Keith Steven & KSA Group Ltd

• Keith Steven, MD KSA Group– Involved in CVA led turnaround since 1994, c400 clients– Author of several online guides for distressed business

people assisting hundreds thousands people annually

• KSA has a team of 20 with 2 insolvency practitioners• Cover the country with 3 offices & a team of regional

managers• Learn more about CVA’s and KSA at

– www.companyrescue.co.uk


ksa group partnership r3 2009

Documents

business background

cva restructure

bank debt

deal ksa

business structure

advisors bank

costs bank

decision time bank