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Background
Rasta Limited used the trading
name 'Caribbean Textiles'. Rasta was involved in the manufacture
and sale of clothing of the type commonly worn in the West
Indies.
With the abolition of "crown preferential
creditors" from 15th September 2003 there is a different
order of priority as to "who gets what" in any insolvency
process after that date.
If you assume that the assets of Rasta
are professionally valued at:
| |
£
|
| Debtors |
250,000
|
| Stock and fixtures |
40,000
|
| Goodwill |
10,000
|
| Total
realisable value of assets |
300,000
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and the creditors were:
| |
£
|
| Bank overdraft (secured
by a debenture) |
270,000
|
| VAT |
110,000
|
| PAYE |
70,000
|
| Trade creditors |
440,000
|
| Total creditors |
890,000
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You can see that the company is insolvent
by £590,000. The company prepared forecasts to determine
if it could or could not trade out of its difficulties. Those
forecasts showed that the weight of creditors of £890,000
was too much to allow an informal trade out.
The core future business was, however,
(if all creditors were removed) capable of earning net profits
of £3,000 a month.
A statement of affairs for Rasta shows
"who gets what" and is a document that assists an
insolvency practitioner in determining what options are open
to the company directors.
Rasta's statement of affairs (ignoring
the impact of "top slicing" as introduced into law
from 15th September 2003) is:
| |
£
|
| Realisable value of
assets |
300,000
|
| Less: First payment
to the bank |
270,000
|
| Cash then remaining
to meet liquidation costs and to make a small dividend
to the unsecured creditors which total £620,000 |
30,000
|
The successor company then commences
with assets of £50,000 (the stock, fixtures and goodwill)
having purchased those assets for that sum from Rasta.
If we assume that that £50,000
was raised by way of new bank borrowing the balance sheet
of the phoenix company after the transaction would be:
| |
£
|
| Assets |
50,000
|
| |
|
| Owed to bank |
50,000
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From this example you can see that the
directors of Rasta who are also the directors of the phoenix
company have "turned around" the business through
this re-structure.
It should go without saying that this
is a very simplified case study. You must take professional
advice from a reputable firm of insolvency practitioners or
turn around specialists as there are various regulatory requirements
to be met and a consideration of alternatives is essential.
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