Last year we received a call from an accountant asking us to meet with one of his clients, whom it turned out was viable for a Company Voluntary Arrangement. His client was in a poor financial position, owing in excess of £400k to unsecured creditors. The company had been loss-making for a number of years and the directors had previously examined ways in which the company could be returned to profitability.
The directors had hoped to be able to gain new clients and thereby increase monthly sales but found that sales actually decreased, causing further difficulties.
There was a significant HM Revenue and Customs (HMRC) debt and the directors were in the process of agreeing a repayment plan with HMRC; however, it was expected that monthly repayments would be a minimum of £10k per month and cashflow projections indicated that the company would be unable to afford repayment at this level.
Background to the Company Voluntary Arrangement
Although the company’s balance sheet identified significant current assets, these were largely comprised of directors’ loan accounts, which the directors were not in a position to repay, and a loan to a company which was insolvent. We were therefore approached by the company’s accountants to review the position and determine a viable solution to the company’s financial position.
The Company Voluntary Arrangement proposal
The directors believed that the underlying business was viable and there was a desire to continue to trade and return the company to profitability. Working with the company’s directors and advisors, cashflow projections were prepared which identified that the company was in a position to trade profitably going forward, whilst also making a contribution towards the historic debt from future income. This formed the basis of the Company Voluntary Arrangement (CVA) proposal that was prepared and subsequently agreed by creditors.
Under the terms of the proposal, the company would make a minimum monthly contribution to creditors. In order to ensure that the company had sufficient funds during the initial months following approval, calculations were made of the cash requirements of the business during those months and surplus funds were made available to the Company Voluntary Arrangement creditors by way of an initial lump sum and a proportion of the realisation of the company’s debtor ledger as at the date of approval of the arrangement. The proposal also provided that annual reviews of the company’s financial position would be undertaken and, where profits allowed, surplus contributions to the CVA would be made. Additional contributions would be calculated at 50% of profits, allowing both the company and its creditors to benefit from profits made.
Performance of the Company Voluntary Arrangement
Having recently passed the first anniversary of the arrangement, the first review of the company’s financial position was undertaken. We met with the company’s accountant who had continued to work with their client following the approval of the Company Voluntary Arrangement to provide accounting services and advice to them to help ensure the success of the CVA.
Management accounts identified that the company had performed largely as expected based on the cash flow projections created by the company’s accountant during the preparation of the Company Voluntary Arrangement proposal. Importantly, the company’s management accounts identified that the company had become profitable again. Without the pressure of the historic debt, the directors were able to focus on implementing their strategy to increase sales and profitability.
At a time when the directors of the company and its advisors were concerned over the future of the company and whether there was any ability to avoid the closure of the business, a Company Voluntary Arrangement was proposed that allowed the directors of the company to continue trading and remain in control of their business. It is expected that the company will continue to be profit-making for the remaining duration of the Company Voluntary Arrangement and beyond.