Sector: Manufacturing – Double Glazing Manufacture and Installation
Size: SME
Turnover: £400,000
Staff: 4 employees
Debts: £95,000
Problem: Winding Up Petition from HMRC debts of £66,000
Date: March 2012
“4R helped us through every stage of the process, we took responsibility for the problems and the failure to manage them. But, to be frank, we learned a huge amount from the whole team at 4R, and these lessons will help ensure we do not get into this situation again.”
In March 2012, one of the two directors of the company contacted 4R Business Recovery as that morning he had received a threat of a Winding Up Petition from HMRC.
4R Business Recovery arranged to meet both directors and shareholders the following day to conduct a business review and discuss rescue, recovery and turnaround options.
The company manufactured double glazed window and door units. Following on from the credit crunch in 2008, the company gradually lost sales momentum, and cash flow suffered. The business, although profitable, required high levels of working capital for raw materials.
As sales and profits reduced to break even it only needed one bad debt to seriously affect cash flow. The directors admitted that the companies accounting system was reactive, with the financial health of the company only really assessed annually, and as a result, the directors were unaware of working capital demands and how this affected solvency.
Unwisely the directors had failed to pay VAT returns as they fell due, using cash for raw materials and wages, to try to trade out of the predicament. In addition, we pointed out that the directors had an overdrawn director’s loan account outstanding.
Unknown to them their accountant had put drawings and unreconciled expenses against a loan account which would need to be repaid if the company failed.
Solution
Creditors Voluntary Liquidation with buyback of assets and goodwill from the liquidation of the old company.
4R Business Recovery identified that the current company was insolvent. While opportunities for reducing costs and stabilising cash flow existed, and therefore a Company Voluntary Arrangement (CVA) was possible, the directors wanted to close and liquidate the limited company.
A CVA was possible, but it is important to remember that a CVA requires a real commitment from the directors, and in this case, this was not possible. A Creditors Voluntary Liquidation was proposed, the company was closed legally and the assets liquidated for the benefit of the company’s creditors.
The directors, who were also the shareholders, agreed that the business could only support one of them as an employee. As a result one of the exiting directors bought the assets and stock from the liquidator for the ‘market price’. He started up a new limited company, of which he was now the sole director and shareholder, a so-called Phoenix Company.
Post Liquidation
The remaining director wanted to trade using a similar name as the original company, as this is prohibited under Section 216 of the insolvency Act, we made an application on his behalf, in line with legal requirements of the Act, for the use of the name on behalf of the director. This was granted.
Each director had an outstanding loan account. We negotiated a very favourable settlement of the outstanding loans with the liquidator of the old company.
When a company fails owing money to HMRC the case is automatically referred to the Insolvency Service by a mechanism called a D Report or notice. This can result in the Insolvency Service undertaking a review of the director’s conduct. In this case, 4R Business Recovery represented the directors as part of their ongoing investigation and no further action was taken.