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Background
Protecta Limited is a security company
providing security guards to other businesses.
The company has 50 employees. The company
has minimal overheads, apart from the "wage cost"
of the employees.
Protecta had four main customers, the
largest of which failed leaving Protecta with a bad debt of
£100,000. Since that bad debt was incurred three months
ago Protecta has recovered its previous level of turnover,
but that turnover is now spread over ten customers.
The cash flow reduction of £100,000
caused by the bad debt resulted in Protecta "stretching
the due dates" of the payments needed to be made to creditors
of Protecta. One of those creditors issued a winding up petition
two weeks ago and the court is to consider whether or not
to make a winding up order at a hearing set to take place
in three weeks time.
As soon as they receive the winding up
petition the directors of Protecta arrange to see a turn around
specialist.
The realisable assets of the company
are determined to be:
| |
£
|
| Good trade debtors |
170,000
|
| Five vans |
25,000
|
| Office equipment |
2,000
|
| Goodwill |
?
_______
|
| Total realisable
value of assets |
197,000
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The amounts owed out by the company are
found to be:
| |
£
|
£
|
| Bank (secured by a debenture) |
|
160,000
|
| VAT |
120,000
|
|
| PAYE |
60,000
|
|
| Other unsecured creditors |
20,000
|
|
| |
|
200,000
|
| Total creditors |
|
360,000
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The adviser explains that since a change
in the law on 15th September 2003 VAT and PAYE are no longer
classed as preferential creditors. The advisor prepares a
statement of affairs which (ignoring the new rules on "top
slicing") shows the order of priority of distributing
the realisable assets should a compulsory liquidation ensue.
| |
£
|
| Realisable
value of assets |
197,000
|
| |
|
| Less: Payable to bankers
under their floating charge |
160,000
|
| |
|
| Surplus cash available
for other creditors which total £200,000 (subject
to settling liquidators costs) |
37,000
|
Clearly the £200,000 of creditors
could not expect much of a dividend in the liquidation after
costs were deducted from the £37,000 net sum available
to them.
Possible Solutions
If it is assumed that the company has
been restored to profitability , but is subject to the creditors
overhang, then the company directors would have explained
to them the following alternatives:
- Freezing the situation by obtaining
an administration order - since new law were introduced
on 15th September 2003 the appointment of an administrator
is a much simplified process. The administration "freezes"
creditors and gives a breathing space to decide what to
do. The appointment of an administrator automatically adjourns
the winding up petition.
- Freezing the situation by proposing
a company voluntary arrangement (CVA) - the advisor points
out that since 1st January 2003 there are two types of CVA
that can be proposed. The advisor explains the pros and
cons of each type. Only one of the CVA's creates an "automatic
freeze" on the winding up petition.
- Commencement of a phoenix company
- the directors of Protecta decide that they do not wish
to propose a CVA but instead wish to incorporate a restart
phoenix company they decide. They decide that they do not
want to acquire the vans and fixtures owned by Protecta
- instead the successor company buys new.
In these circumstances the directors
will face an uncertain financial position as they will need
to purchase the "goodwill" of the business from
the ultimate liquidator of Protecta Limited.
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