Insolvency Administration Case Study Number 1 - Difficulties caused by large bad debt

Control of the company returned to the directors after substantial amounts of creditors had been shed

This Administration case study shows how your company could be revived and put on a sound financial footing.

The circumstances:

  • The illustrative and fictional company, called Security First Plymouth Limited, employs 200 people and is in the business of providing security guards and related security services.
  • the company has, over the previous three years experienced a pattern of increasing turnover and net profit!
  • the major customer of Security First Plymouth Ltd became insolvent and created a bad debt for the company of £150,000
  • Security First Plymouth Limited was insufficiently capitalised to withstand this bad debt and the position was aggravated when the bankers reduced the facility by £50,000 as a reaction to the loss caused by the bad debt.
  • with its reduced resources the company could manage to pay its weekly payroll but could not meet PAYE and VAT when due.
  • the Inland Revenue issued a winding up petition for the non payment of PAYE
  • the directors of Security First consulted an insolvency practitioner (IP) seven days before the winding up hearing was due to take place.

Review by the Insolvency Practitioner:

 The IP and his staff:

  • tabulated the financial history of X Limited 
  • contributed to the preparation of updated profit and loss accounts with detailed input by the company
  • reviewed previously existing marketing plans, forecasts, operational plans and people plans 
  • formulated a "business model" and prepared integrated forecasts of profit, cash flow and balance sheet on the basis of existing creditors being frozen
  • discussed the business, its people and its future with the directors, senior managers, a selection of employees, the main creditors, the main customers, the company bankers and the petitioning creditor.
  • reviewed in detail the history of the interactions between the company and the petitioning creditor
  • prepared a statement to identify the recovery the creditors might expect on a liquidation - this turned out to be a dividend of of 10 pence in the pound.

Results of the Review

The review revealed, as common sense would expect, that Security First Plymouth Limited would survive if:

  • all creditors were frozen
  • overheads were reduced in line with the lower level of turnover now anticipated
  • future management actions were defined for the following areas of the business :
    • marketing
    • finance
    • people
    • systems

A short report was produced called the "Review Report".

Second steps taken by the Company along with the Insolvency Practitioner (IP)

Following agreement with the IP the directors made an application to the court for an administration order. That application included the advisers report.

The application to court identified the purpose of the application as being the "survival of the company by freezing creditors and then proposing a company voluntary arrangement (CVA), where creditors were to receive a dividend of 60 pence in the pound over a four year period."

The court granted the administration order - the judge who considered the matter agreed that there was a realistic possibility of a return to creditors under a CVA of 60 pence in the pound as compared to the 10 pence in the pound that was the estimated return in a liquidation.

Third step - the IP as Administrator

One result of the court order was that the IP now had an official status as administrator. A further result was that the winding up petition by the Inland Revenue could not be pursued . An additional consequence was that all third party creditors were frozen.

In this particular case the administrator and the director had previously agreed to the following actions being taken:

  • the redundancy of one third of the employees (to reflect the loss of the main customer)
  • the redundancy of one manager and one director
  • a company voluntary arrangement (CVA) proposal be prepared and sent to creditors
  • because the CVA proposal was to be considered by the creditors 21 days later the administrator did not, in this case have to take a major role in the management of the business in the intervening period. (Other than monitoring buying and monitoring movements the administration bank account)

The CVA proposal was agreed by the creditors at a creditors meeting. Under that CVA proposal the company agreed to pay to the supervisor of the CVA £4,000 a month for a four year period. The administrator applied to the court for his release as administrator the day following the agreement of the CVA.

The costs of the administration were agreed with the creditors at the creditors meeting when the creditors voted on the administrators proposals.

Fourth step - The company returned to the directors

Following the agreement of the cva, the management of the company was returned to the directors.

Obtain the benefits of an Insolvency Administration to restructure your company's financial affairs. We can give you a presentation of what we could make happen for your company and how control of the business is returned to you.

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