We were instructed to advise the directors of two connected companies regarding cash flow difficulties that they were experiencing relating to HMRC arrears.
The companies involved were in the recruitment sector specialising in the supply of temporary staff cover and permanent recruitment solutions to health and social care services.
Company A had a bank of staff that it provided to company B when it had temporary positions for clients to be filled. Company B invoiced the clients and paid company A for the provision of staff.
A build-up of HMRC debt
The companies had traded successfully for a number of years but experienced problems when it was established that an employee had been transferring funds from the company’s accounts into their own personal account. The transfers were largely disguised as payments in respect of the ongoing HMRC debt.
As a result of the action, both companies ended up with significant HMRC debt and arrears to other creditors, totalling in excess of £500k. It is ideally important to tackle the possibility of becoming insolvent before HMRC hits.
HMRC debt can lead to winding up petitions
The directors had been under pressure from HMRC with threats of winding up petitions against both companies. As a result the company’s accountants had spoken to HMRC with regard to agreeing a time to pay arrangement with them to clear the arrears and HMRC had indicated that would accept monthly payments but at a significant level due to the size of the debts of the two companies.
The accountant was concerned that the level of monthly repayment that HMRC was requesting was unsustainable and that the agreement would eventually fail, so recommended that the directors sought our advice on their options.
When the directors first consulted us, they believed that there was no option other than to agree to the time to pay arrangement at a level that was unrealistic or to wind up both companies.
Expert practitioners can review your HMRC debt and options available
We explored the options available to them and reviewed the viability of the companies. It was clear that company A, which had already ceased trading and had significant HMRC debt should be wound up, as there was no means of repaying the debt via a time to pay arrangement other than by company B funding the repayments.
If company B was to fund both time to pay arrangements, it was likely that the arrangements would fail and both companies’ would eventually end up being wound up.
We then looked at the options for company B.
We discussed whether it would be possible to agree a time to pay arrangement with HMRC at a reduced level and agree payment plans with other creditors. However due to the level of HMRC debt and the fact it was unlikely that creditors could be paid in full in a reasonable period of time, that an informal arrangement with creditors would not be achievable.
We then considered whether company B should also be placed into liquidation. The directors were keen to avoid liquidation if possible as they felt that the business was viable and if it could continue to trade they could trade out of the current situation.
If they were to liquidate the company, the directors would have wanted to start in business again and they would have had to set up a new company to do so with the inherent difficulties that that brings.
If they were to start another company, they were going to have difficulties in dealing with their working capital requirements. As the company provided temporary staff, they had to pay the staff before the clients had paid them. This meant that they had to fund the staff wages for a number of weeks and if they started a new company they would have no funds to do that.
On liquidation the amounts owed to the company from clients would be collected by the liquidator and made available for creditors so this cash flow funding would be lost to any new company.
HMRC debt can be resolved with a Company Voluntary Arrangement
As a result we considered whether company B should propose a company voluntary arrangement.
Company B was a viable business and had been making profits. Its problems had occurred due to a one off event, the misappropriation of funds, and therefore if company B could continue to trade with affordable payments being agreed with its creditors then it was believed that the company could survive and trade through the cash flow difficulties.
In addition company B was owed money from clients at the time of proposing the CVA and the proposal was drafted to allow the company to retain the majority of the debtor receipts as they were received to fund future trading and working capital requirements thus assisting with the initial cash flow requirements of the company which would have been an issue had the company been liquidated.
It was therefore decided that Company A should be placed into liquidation and company B should propose a Company Voluntary Arrangement (CVA) to its creditors.
By liquidating company A, company B could continue to trade and manage its cash flow in order to enable payments to be made from future profits into the CVA for the benefit of creditors.
Company Voluntary Arrangements can benefit both the company and creditors
The benefit to creditors of this is that creditors can now expect a minimum return against their debt of 28 pence in the £ as opposed to 10 pence in the £ that may have been achieved had the company been liquidated.
The benefit to the company was that the business would continue, jobs would be saved and the creditors could be repaid as much as possible from future trading with future profits and success enhancing the return to creditors.
One year on the company is trading profitably and growing, having had a successful year building on the reputation that had been gained over a number of years without the distraction of the HMRC debt which has inevitably caused the business to suffer.