Bankruptcy/Annulment

Mr R, a single man who ran his own business as a self-employed builder, approached us for advice after being made bankrupt seven months earlier. He had failed to keep up to date with his bookkeeping and had neglected his tax affairs in particular. Ultimately, he had not dealt with a bankruptcy petition presented against him and an order had been made. In addition another Insolvency Practitioner had been appointed to be his Trustee just a month or so before he decided to contact us.

Apart from explaining the circumstances surrounding the bankruptcy, at our first meeting he told us that:

• his debts were only about £17,000 with two creditors combined having over 80% of the total;
  
• he owned a property in his sole name. He lived in the property and it had a relatively small mortgage (less than 20% of its value) secured on it;
  
• he also owned a half share of his mother’s home which was mortgage free. He was plainly worried about the effect on his mother of his trustee’s interest in the property;
  
• in addition he owned some paintings and antiques, a car and three pensions;
  
• finally, in his business he had work in progress and equipment.

With our help he proposed an IVA to enable the bankruptcy order to subsequently be annulled and we also obtained the agreement of his trustee in bankruptcy. Under the terms of the IVA he proposed to re-mortgage his own property within six months to raise sufficient funds to pay the costs and expenses of the bankruptcy, together with the creditors’ claims in the IVA.

In response to the proposal various modifications were proposed by creditors and we adjourned the creditors meeting for a fortnight to allow us to negotiate with the creditors on behalf of Mr R. At the adjourned meeting the proposal was approved in basically the same form but allowing only four months for the remortgage and obliging Mr R to make a nominal monthly contribution of £75.

Mr R’s bankruptcy was annulled but, as the four month deadline approached it became clear that, although the contributions had been made and the remortgage was proceeding, the Inland Revenue would be unable to submit details of their claim in time. On Mr R’s behalf we obtained creditors’ agreement to a two month extension and, subsequently, all creditors were paid in full, together with statutory interest. As a result Mr R was able to continue to trade his business and retain his home and his mother was left unmolested

Administration

We were contacted by the sole director of a company which operated in the labour market.  The company had a history of profitable trading but had lost major contracts and had entered a Company Voluntary Arrangement with another Insolvency Practitioner about five months earlier.  It had become clear that the company could not fulfil its obligations under the arrangement.

Our initial discussions revealed:

• assets listed at a book value of about £350,000 were, in the event of a liquidation, worth very little;
• book debts were factored
• there were unsecured debts in excess of £570,000;
• the contracts for supply of staff belonging to the company would fall away if the company failed to supply staff and the jobs of over 100 people would be lost.

With our agents we investigated the value of the chattel assets and concluded that the likely value in a going concern sale was much greater than in liquidation.  We also concluded that there would be value in the goodwill if a buyer could be found.  In addition, jobs could be saved and with the continuity of supply it would be easier to collect book debts. 

Since time was of the essence it was impossible to market the business on the open market but we obtained an offer from the director for the purchase of the business and goodwill if the changeover was “seamless”.  We reached the opinion that a pre-packed sale from an administration was likely to give a better recovery for creditors than in liquidation.

Having arranged for the company to go into administration we sold the goodwill and most of the chattel assets to a successor company and went on to inform creditors of what had taken place.  The effect of this strategy was to generate a sum of money for creditors where none might have otherwise been available, to safeguard the jobs of over one hundred people and to maintain continuity of supply for the customers.

Company Voluntary Arrangement

The Managing Director of a company with a turnover of over £6m which had traded in the optical industry for about fourteen years contacted us and told us that a series of unfortunate events had led the company to a position where it had severe cashflow problems.  The directors had, in the short term, secured the support of major suppliers to continue supplies on agreed terms and had rationalised operations to withdraw from two locations distant from its base.

Our initial discussions revealed that:

• the company had about £3m of assets at book value worth about £900,000 in a liquidation;
• the company owed the Inland Revenue about £70,000 preferentially;
• the company also owed just under £3m including a recent loan from the Managing Director, almost £500,000 to the pension fund and over 160 trade creditors;
• the book debts were discounted with the Bank and the company had eight finance agreements;
• the company traded from leased premises and had previously sold its freehold property.

After “ring-fencing” the legacy debt the figures produced by the company showed a projected turnover of £5.8m with a profit of over £160,000 in the coming year.

With the Managing Director we approached the major suppliers and the Bank to discuss the prospect of their continued support to allow us time to put together a rescue and to support the rescue plan once it was formulated.  A five year Company Voluntary Arrangement based on profit was proposed and approved on the basis that unsecured creditors could expect to receive 93p in the £.

The arrangement proceeded for about two years when it became apparent that the market had changed considerably and, having discussed the options with the major creditors, a variation was proposed and accepted that allowed the arrangement to be concluded early with the company paying a one-off final contribution of £221,000.  We had already paid the unsecured creditors a dividend of 7.5p in the £ and the final dividend of 10p in the £ the company had paid 17.5p in the £ on claims of about £2.2m which is, admittedly, somewhat less than envisaged at the start.

The company survived, its employees kept their jobs and the company continued to trade with the bulk of the creditors in the arrangement.  The variation shows the flexibility afforded by a Company Voluntary Arrangement where circumstances change unexpectedly and the willingness of creditors to work with a sick company which behaves in an open and transparent way.

Members’ Voluntary Liquidation (solvent liquidation)

A company which had traded for many years had operated a landfill site and, having filled the site, had spent the last few years monitoring the site.  The directors and shareholders had decided the time had come to extract the surplus cash and because of the uncertainty as to claims in the future were persuaded to liquidate the company.

The first meeting showed that the company had:

• cash of about £42,000;
• trade and expense creditors of about £16,000.

The company was placed into members’ voluntary liquidation in the April and I paid the various creditors.  With the help of the company’s accountants I finalised the company’s tax affairs and obtained clearance to conclude the liquidation.  I also advertised for claims in the local newspaper and disclaimed the company’s waste management licence and paid shareholders 47.5p per £1 ordinary share in the October.  Finally, just prior to closing the liquidation in November I made a second and final distribution of a further 2p per share.

The shareholders had received their due, creditors had been settled and the liquidation concluded within eight months despite the complications associated with the type of business and a line effectively drawn as far as claims against the company.

Solvent Reconstruction (S110 Reconstruction)

A S110 Insolvency Act 1986 scheme does not need court approval and deals with a corporate reconstruction.  It must be admitted that it is slightly odd that a solvent reconstruction is governed by the “Insolvency” Act but there we are!

We have used S110 reconstructions to rearrange groups of companies in order to take account of changes in markets, operating styles, participators or to accommodate family or business partners who wish to change their level or sphere of involvement.  Equally, we have also used S110 to create groups where one company existed previously.

All of our reconstructions will necessitate close consideration of the tax effects of the strategy and we work closely with PEM’s tax team to ensure we achieve the desired result.  Having said that, we have, of course, worked just as closely with many other tax advisors and often receive referrals from them.

The case………

In this case the company was a retailer which had traded from the High Street of a large town for many years.  The company had a thriving business, owned the freehold of its store and had been run by the same family throughout.  The original directors had reached the age where they wished to pass the business to the next generation but the younger element were unable to obtain the substantial finance needed to buy the company lock, stock and barrel.

Our discussions established that the freehold property itself was worth a considerable sum and this was, in effect a bar to entry by the second generation.  So, using the S110 route, we divided the company’s assets so that the property was held by a new subsidiary and the trade by a further subsidiary with a lease between the two.  We assisted with the huge logistical exercise involved in transferring the trade and ensuring the legal niceties were observed whilst ensuring that HM Revenue and Customs were content with what we were doing.

Finally, we liquidated the original company so that the shares in the two subsidiaries (the property company and the trading company) could be passed to the individual shareholders which in turn would allow them to achieve the required objective and allow the business to be run by the second generation of the family.