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Cash Flow & Forecasting Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

High Court CVA clarification for landlords

High Court ruling for landlords on CVARecently in the High Court landlords challenged the validity of the CVA (Company Voluntary Arrangement) that was approved for the High Street Debenhams retail chain.
The store chain had announced that its restructuring plan based on the closure of 50 stores and rent reductions for up to 100 others.
Major shareholder Mike Ashley, owner of Sports Direct, had sought to challenge the CVA after the board of Debenhams rejected his offer to buy the chain for £200 million. His shareholding was wiped out when the company went private as part of the rescue and restructuring deal, which was approved by 80% of its landlords.
Although Ashley withdrew his own challenge to the CVA, he continued by backing a legal challenge from Combined Property Control Group (CPC) as landlords who owned several properties.
According to CMS Law the five grounds of the CPC challenge were:

  1. Future rent is not a “debt” and so the landlords are not creditors, such that the CVA cannot bind them;
  2. A CVA cannot operate to reduce rent payable under leases: it is automatically unfairly prejudicial;
  3. The right to forfeiture is a proprietary right that cannot be altered by a CVA;
  4. The CVA treats the landlords less favourably than other unsecured creditors without any proper justification;
  5. There is a material irregularity: the CVA fails to adequately disclose the existence of potential “claw back” claims in an administration.

Items 1, 2, 4 and 5 were rejected by the High Court, although item 3 was upheld, meaning that the landlord retains the right of re-entry and to forfeit a lease and therefore this right cannot be modified by a CVA.
This means that if they choose to, landlords can take back their property, although in the current perilous circumstances in the retail sector it is questionable if this would be in their interests given the difficulties they might have in finding an alternative tenant and their liability for rates even when the property is vacant.
The findings did however leave open the prospect of a challenge over the reduction in the rent value if it could be proven that it was below the current market value.
Given the growth in the use of CVAs to exit unwanted leases and reduce rent in the struggling High Street retail sector, the High Court judgement is to be welcomed, both for those retailers hoping to survive by restructuring their businesses onto a hopefully more sustainable footing by reducing their overheads, and for landlords, who now have some clarity about their position in such cases.

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Finance Insolvency Rescue, Restructuring & Recovery Turnaround

A sorry tale supports the case for proposed changes to insolvency regulation

stressed businessman 2 Huffington PostWe were recently involved in helping an insolvent construction company with their restructuring, which was necessary for them to survive.
All had been going according to plan, with the directors, shareholders and most creditors on board in support of a CVA proposal that would have helped the business to survive.
Or so we thought.
Having finalised the CVA proposal it was being reviewed by one insolvency practitioner (IP) who was expecting to act as Nominee and Supervisor when another IP turned up at the company offices having an hour earlier been appointed Administrator without notice being served on the company.
Unknown to the directors, it transpired that one of three shareholders, who incidentally had shortly beforehand resigned as a director and was also a creditor, had independently sought advice from an IP with the inevitable results. We deduced that not only had the IP advised the shareholder/creditor that an Administrator should be appointed but also had advised them not to reveal this to the company’s directors or the proposed Nominee.
We can only presume that the IP concerned saw an opportunity to get himself appointed without first checking what might be in the best interests of creditors.
What the IP/Administrator clearly did not understand was the nature of debt in construction companies, where there are usually very few recoverable fixed assets and debt is normally based on applications for payment and certificates as project related payments. Construction project debt is complicated due to the set-off nature of debt when a company is unable to complete a project. The IP’s staff had to ask the directors to explain applications and certificates.

The case for imposing proposed changes to insolvency regulation

So, an opportunity for a consensual restructuring that was acceptable to nearly all those involved was lost, and there was arguably a conflict of interest in that the IP’s own interest was in their fee, they had a duty to look after the party that appointed them, but as Administrator their main duty is to act in the best interests of all creditors.
While one of the outcomes of Administration is a CVA, the practice of most IPs is to use it for the purposes of a better realisation. Cynics might argue that this offers scope for maximising the IP’s fees.
Despite the clear benefit that a CVA offered to creditors on the example cited above, it will be no surprise that the Administration pursued a better realisation purpose, without the better realisation being achieved.
All of which supports the Insolvency Service’s current proposal for a three-month moratorium against enforcement or legal action by creditors and allows time for rescue plans to be prepared and considered by creditors.

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Insolvent Companies can Survive a Winding-Up Petition

overcome a Winding-Up PetitionIt is possible to get a Winding-Up Petition dismissed even when a business is insolvent and does not have the funds to pay off the creditor(s) who have brought the matter to court.
If a company is insolvent and therefore unable to pay its debts on time, it may still be a viable business with a perfectly good product or service to sell.
A review of the accounts, the cash flow, the processes and scope for restructuring and other initiatives to improve profits will need to be carried out by a turnaround specialist who will also prepare an appropriate turnaround plan.
The turnaround plan forms the basis of demonstrating viability such that it is possible to persuade creditors to accept deferred payments.
The turnaround plan is incorporated into a formal proposal to creditors for a Company Voluntary Arrangement (CVA). In addition to the turnaround plan, a CVA Proposal will include proposals for debt repayment and in some cases for debt write-off.
A CVA is a formal proposal where the process has to be carried out in defined steps to comply with the Insolvency Act and should only be done with the help of a Turnaround or Insolvency Practitioner.  While approval is required from 75% of the creditors who vote, it is arguably in the creditors’ interests to agree such an arrangement as they are more likely to get their money than they would be if the company were Wound-Up.
If pursuing a CVA while a Winding-Up Petition is outstanding, this can be adjourned to allow time for the CVA Proposal to be prepared and the formal process to be followed but any adjournment will leave little time for delay so again specialist help is needed.
Once a CVA is approved the Winding-Up Petition is normally dismissed.
In summary a CVA offers the opportunity for an insolvent company to survive a Winding-Up Petition.
You can find out more about Winding-Up Petitions and CVAs in the free articles that are available online in the ‘K2 Knowledge Bank’ or via App Stores in the ‘Turnaround’ App.

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Cash Flow & Forecasting Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Surviving a Winding-Up Petition

WindingupPetition helpA Winding-Up Petition need not be the end of a business, but it does require prompt and decisive actions if the business is to survive.
Given that a Petition is usually served when a creditor, be it a supplier or HMRC, has run out of patience, a review of both the financial position and the future prospects is necessary before considering the options for dealing with the Petition. There are several.
When a company’s financial position and cash flow forecasts are dire it is not likely to have the funds to pay off the debt such that financial restructuring is often needed if the business is to be saved.
In addition, the cause of the financial situation is often the business model where an operational reorganisation is also often needed if the business is to survive.
Both the review and implementing change are not something to be undertaken without experience where the help of a turnaround expert is necessary.
Turnaround experts, also called Company Doctors or Restructuring Advisers, will be able to put together a strategy to deal with the immediate need to answer to the court on the required date, will be able to advise on what you are legally obliged to do and will help you to plan a strategy for the future of the business.
There are three main options for dealing with the first hearing of a Winding-Up Petition.
If the business believes that it does not owe the amount stated in the Petition, it can dispute the debt and ask for the petition to be withdrawn and apply to court to stop it being published in the London Gazette.  However, any dispute needs to be credible, and supported by evidence that will be examined as part of the directions (dispute) procedure.
If the review identifies a viable business but the Petition debt cannot be paid before it is heard then a long-term payment plan may be best using a CVA (Company Voluntary Arrangement).  CVAs require consent of a requisite majority of creditors and can also be used to write off a portion of the debt but all too many fail because they are not based on a turnaround plan that is prepared by a suitably experienced adviser.
While there are other options these are covered in the CVA Guide and free articles that are available online in the ‘K2 Knowledge Bank’ or via App Stores in the ‘Turnaround’ App.

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Banks, Lenders & Investors Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Ruling on creditors meetings will help improve CVA outcomes

Creditors meetings for insolvency proceedings will no longer be needed unless requested by least 10% of creditors following a new government ruling as part of its small business reforms.
The Insolvency Service argued that attendance of creditors’ meetings is poor and there are more effective means of engagement in the 21st Century.
When trying to rescue a business in difficulty, Insolvency Practitioners have a number of options and one of the most helpful is the CVA (Creditors’ Voluntary Agreement) by which debts can be negotiated by a company to repay its creditors over a longer period and sometimes repaying a reduced amount.
Proposals must be drawn up and submitted to all creditors in advance for negotiation and approval. Approval requires a majority of 75% of votes cast.
Since any insolvency proceeding has to comply with a series of steps laid down by law, and IPs are paid for their services, the costs can quickly mount when creditors’ meetings are added to the mix.
Subject to approval the cost of holding creditors’ meetings can be saved and reduce the burden on both the company as well as improving the distribution to creditors.

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Banks, Lenders & Investors General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Zombie companies have a number of options for achieving growth

Zombie companies will at some time need to confront three fundamental problems before they can achieve growth: 1. how to fund growth; 2. how to repay debt; and 3. how to service interest when rates rise.
Provided that a zombie company can generate profits on an EBITDA basis (earnings before interest, taxes, depreciation, and amortization), it has a number of options for resolving these problems as a pre-requisite for growth.
Options include negotiating a partial debt write-off, a pre-pack sale via Administration or a Company Voluntary Arrangement (CVA).
From the suppliers’ viewpoint a growing business offers the prospect of increased profits from increased supplies. From the existing lenders’ viewpoint profitable growth means that non-performing debts can be repaid. From a new investor’s viewpoint, new money can be used to fund growth rather than replace existing debt. From the company’s viewpoint growth inspires confidence in the future prospects of the business. 
Given the benefits, it makes sense for zombie companies to get help from restructuring experts who are familiar with these options.

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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.
While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.
Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.
Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”
Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.
While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Break Free from Servicing Debt and Invest in Growth

Britain lacks self confidence and suffers from inadequate education, risk averse bureaucrats and unimaginative politicians trapped in the Westminster bubble outside the real world.
Former CBI chief Lord Digby Jones identifies all these as obstacles to rejuvenating UK Plc in an extract from his book Fixing Britain. It’s a picture K2 recognises.
“Too much of Britain is focused on repaying debt and not on investment in growth,” he says. “Too many companies are servicing debt and existing for the benefit of the banks when they should be cramming down debt and pursuing a clear strategy.”
Lenders, more interested in loans being repaid than on growing their customers, are stifling businesses with potential by soaking up surplus cash to service and repay their loans.
In our view companies should return to being run for their shareholders and employees rather than for the benefit of lenders. Rescue advisers can help companies with debt restructure by renegotiating loans and interest, converting debt to equity or using a CVA to cram down debt.
We need to create a market-driven and investment culture, where profits are reinvested and appropriate tax incentives to encourage business investment.
The UK cannot compete as a low-cost manufacturer with countries like India or China and therefore businesses need to focus on high value goods and services requiring specialist knowledge to justify a premium. This is why high calibre education of young people and apprenticeships are needed.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

First decline in household income for 30 years causes pain on the High Street

The Office for National Statistics (ONS) reported recently that in 2010 real household disposable income fell by 0.8%, its first drop since 1977.
A plethora of profit warnings from major high street retailers is therefore no surprise. JJB successfully agreed a new Company Voluntary Arrangement (CVA) for repaying debt, just two years after its last one. Oddbins’ attempts to agree a CVA were rejected which led to it going into administration.
Meanwhile travel company Thomas Cook announced a 6% fall in holiday bookings from the UK. Dixons announced that it was cutting capital expenditure by 25%. H Samuel and Ernest Jones, Argos and Comet all report falling sales. Mothercare is to close a third of its 373 UK stores and HMV has just sold Waterstones for £53 million to pay down some of its £170 million of debt.
Falling consumer confidence, the Government’s austerity measures and rising commodity prices have led to a steady erosion of disposable income. An April report indicated an increase in retail sales, up 0.2% on February’s, but this was attributed to non-store (internet) and small store sales and probably conceals a continued decline in High Street sales.
After a few years of expansion fuelled by debt, it is entirely logical that the marketplace is now facing a sharp contraction as consumers spend less money while they are concerned about their job security and repaying their huge levels of personal debt.
Many companies need to contract and reduce their cost base if they are to survive. For the High Street retailers this means concentrating on profitable stores and reviewing strategy.
Growth is likely to involve developing experience based retail outlets in dedicated shopping environments or direct sales such as online. The High Street has failed to reinvent itself and the recession has accelerated its decline.

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General HM Revenue & Customs, VAT & PAYE Insolvency Turnaround Voluntary Arrangements - CVAs

HM Revenue and Customs is Increasingly Rejecting CVA Proposals

It is not being much talked about in the marketplace but it is becoming increasingly common for HM Revenue and Customs (HMRC) to reject Company Voluntary Arrangements that would previously have been accepted.
In the past HMRC has appeared to be a great supporter of CVAs, but recently they have been rejecting a number of CVA proposals that they would have approved in the past.
While there are no published statistics on the numbers of liquidations resulting from failed CVAs, historically a large percentage have failed. Business rescue advisers and insolvency practitioners believe that the failure rate of CVAs post approval is somewhere between 60% and 70%.
HMRC website guidelines to case officers indicate that they should attempt to get arrears repaid within 12 months with longer periods being the exception. This may explain why HMRC is now rejecting more proposals.
A CVA can be used to improve cash flow quickly in order to keep trading while paying off its debts in a manageable way.  It is a legally binding agreement between an insolvent company and its creditors to repay some, or all, of its historic debts out of future profits, over a period of time.
For a business in difficulty a low level of contributions in the early period of a CVA allows it to get back on its feet in the short term while refocusing the business on survival and increasing profits, thus enabling it to pay higher contributions later in the CVA.  This increases the chances of the business being able to maintain its payments throughout the CVA period and reducing the risk of failure. High repayments required in the early stages will mean it cannot do this.
However, many CVAs are drafted by insolvency practitioners with a view to the proposal being approved, and as a result many of those being approved today are offering significant contributions to creditors, some exceeding 100p in the £.
While the greater contribution improves the chances of a CVA proposal being approved by creditors, the lack of realism about a company’s ability to achieve the commitments is the reason for such a high failure rate post approval.

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General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Guide to Company Voluntary Arrangements (CVA) and When to Use Them

A Company Voluntary Arrangement (CVA) is a binding agreement between a company and those to whom it owes money (creditors).
It is based on a proposal that will include affordable, realistic and manageable repayment terms. It normally allows for repayment to be spread over a period of three to five years and can also be used to offer to repay less than the amount due if this is all the company can afford.
The proposal is sent to the Company’s Creditors along with an independent report on the proposal by an insolvency practitioner acting as Nominee.
Creditors are invited to respond to the CVA proposal by voting to either accept it, or reject it, or accept it subject to modifications that the Creditor proposes as a condition of their vote for acceptance. The votes are counted by value of claim where the requisite majority for approval is 75% of the votes cast. This is subject to a second vote to check that 50% of the non-connected creditors approve the proposals.
A CVA can only be used when a company is insolvent but it can be used to save a company rather than close it when creditors are pressing including when a debt related judgement can’t be satisfied or a creditor has filed a Winding Up Petition (WUP).
In addition to proposing terms for repaying debt, it helps to include details of any restructuring and reorganisation along with a business plan so that creditors can assess the viability of the surviving business. The proposals must be fair and not prejudice any individual or class of creditor including those with specific rights such as personal guarantees. These include trade suppliers, credit insurers, finance providers, employees, landlords and HM Revenue and Customs, the latter often being key in view of the arrears of VAT and PAYE that many companies have built up.
A CVA should only be used when the company’s directors are willing to be honest with themselves and face up to the position the company is in, preferably with the advice and guidance of an insolvency practitioner or experienced business rescue advisor but used properly it can improve a company’s cash flow very quickly by removing onerous financial obligations and easing the pressure from creditors.

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Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Save Your Company by Terminating Onerous Contracts to Cut Costs

Many directors are afraid of terminating contracts and agreements when their companies are in financial difficulties normally out of a concern that termination will lead to a cancellation payment that the company cannot afford.
If a company is experiencing fewer orders or lower sales, for example, generally it will need fewer staff but the worry is that terminating contracts of employment will trigger costs, particularly where senior staff are involved.
Similarly, a reduction in orders may mean that the company only needs two of the five fork lift trucks it has where terminating a hire purchase, hire or lease arrangement ahead of the agreed contract period will trigger a termination settlement or a contract termination liability.
Equally it might now no longer be able to afford the 12-month advertising contract it agreed six months previously. Even terminating contracts with advisers can be expensive.
A company in financial difficulties does not have the surplus cash to meet these obligations.  But while it puts off terminating arrangements it no longer needs it continues to bear the costs.
It is often better to cut the cash flow if this reduces costs that mean the business is viable: profitable with positive cash flow. There are remedies that can be used if necessary to deal with the crystallised liabilities when a company cannot afford them.
Negotiating terms for informal arrangements with creditors is sensible. It may involve negotiating terms of payment, such as a Time to Pay (TTP) arrangement with HMRC for PAYE or VAT arrears, which have been very effective in helping companies out of insolvency.
Many companies leave it far too late to reach informal arrangements that would have allowed them to terminate contracts before the company finally runs out of money.
But there is a solution that allows companies to terminate contracts and not pay for them immediately on termination. A Company Voluntary Arrangement (CVA) avoids liquidation of the business and closing it down. It allows for paying the contract termination out of profits.

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General Insolvency Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Guide to Insolvent Liquidation and When and How it is Used

Insolvent Liquidation involves a formal process to close a company. It happens when a company is insolvent, which means it does not have enough cash or liquid assets to pay its debts and the directors have concluded that continuing to trade will be detrimental to creditors.
There are four tests (set out in the Insolvency Act 1986) any of which can be used to establish whether a company is insolvent.  The tests don’t necessarily mean that the company will have to close down, although often directors assume that it must.  However, there are remedies that could save the company if at this stage it calls on a licensed insolvency practitioner or business turnaround adviser, who would carry out a review of the accounts, the assets including property, stock and debts and the liabilities. With help from the adviser, the company can develop realistic plans for it to survive and trade out of insolvency.
Once it is decided that the company is insolvent, and cannot be rescued, it should be closed down in an orderly fashion which means via a liquidation process. This involves the company’s assets being turned into cash and used to pay off its debts to creditors.
There are two types of liquidation, one compulsory and one voluntary and both are legal processes.
Voluntary liquidation through a Creditors’ Voluntary Liquidation (CVL) is when the directors of the company themselves conclude that the company can no longer go on trading and should be wound up.
Normally they would engage an insolvency practitioner to help guide the directors through the formal procedure, which involves a board meeting to convene shareholder and creditor meetings.
The nominated liquidator normally sends out notices to shareholders and creditors having obtained their details from the directors and helps directors prepare the necessary formal documentation that is legally required.
The nominated liquidator must be a licensed insolvency practitioner who provides his consent to act which must be available for inspection at the meeting.
If the directors have left consulting too late they can then find themselves facing the court winding up procedure rather than having the option of a CVL.
Compulsory liquidation is triggered by a creditor formally asking the courts to have a company closed down by submitting a Winding Up Petition (WUP. In this case the court decides whether or not to support the petition by ordering that the company be wound up (compulsorily liquidated).
Upon a winding up order being made, an officer called the official receiver is automatically appointed to take control of the company to oversee the process of closing it down.  The official receiver may, if he/she wishes, appoint a liquidator to assist in dealing with recovering and selling any assets.

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Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Dealing with the Bank When Considering a Company Voluntary Arrangement

The large number of companies in financial difficulties is swamping the banks and as a result there is a lack of experience in banks when dealing with companies in the process of restructuring.
If a company is subject to a Winding-up Petition (WUP) the bank can be held liable for any funds that are paid out of its bank account once the Petition has been advertised in the London Gazette. As a result banks tend to freeze the accounts of any company with an outstanding WUP as soon as they become aware of it. The only way for a company to free up money in a frozen account is via an application to Court for a Validation Order.
When attempting to save a company where there is no WUP, however, the lack of experience among banks means that in some instances they are behaving as if there were a WUP and this is getting in the way of attempts to restructure because banks do not understand the distinction between the various restructuring tools.
An example of where this is happening is when a Company Voluntary Arrangement (CVA) is being proposed.  The process of agreeing a CVA involves notifying creditors of the intention and allowing time for a meeting to be set up for creditors to approve the CVA proposals. Usually there is a hiatus period of at least three weeks between notification and the meeting, which allows creditors to consider the proposals and make any comments or request adjustments before the meeting.
However, banks’ inexperience of CVAs is leading some of them to freeze company accounts during the hiatus period and this has an adverse effect in that the company is no longer able to trade. While banks generally do not have the right to freeze their clients’ bank accounts unless there is either a WUP, an order by the Court or a breach of contract, they may take precautionary action out of fear when they don’t know what is going on. Concern about fraud can always be used to justify such an action.
It therefore makes sense for a company to talk to its bank beforehand to let them know what’s going on. Where the company is overdrawn clearly the bank is a creditor and should be notified of any restructuring proposals, in particular where there is a CVA.

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Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

Turnaround Forecasting is About Reality, Not Wishful Thinking

Most forecasting is generally done for lending, fund raising or other investor related purposes and therefore with hope of future growth built into the forecast. Such forecasts show how loans will be repaid and investors will achieve a return on their money. Such forecasts are often more about hope than reality.
On the other hand, a turnaround forecast must be achieved and ideally exceeded and is more oriented towards improving cash flow than making future profits.  Low expectations are set so that the business does better than forecast, especially if the business is looking for support from the bank or additional finance that tends to have expensive penalties for failure. Therefore turnaround forecasting will deal with a level of detail where a turnaround business plan is essential.
So the turnaround forecast is used to show the pre-turnaround business model, and then the costs of implementing the turnaround and then the post-turnaround business model. To illustrate this take the situation of a company recently helped by K2 Business Rescue, that has shrunk and no longer needs two factory units and is looking to consolidate into one to reduce premises costs.
The less expensive but ideal unit needs three-phase electricity installing to operate the heavy equipment that is in the second unit, but the electricity supplier has switched off the power in that unit due to an overdue account. The cost of reinstating the existing supply, however, is similar to the cost of installing the new three-phase supply.
K2’s turnaround forecast showed a significant cash saving if the move was brought forward by investing in the three-phase installation which both cut premises costs and saved the cash that would otherwise have been needed to pay to reinstate electricity as well as install the three-phase. The focus on cash helped make this decision, the profit and loss benefit helped justify it. And the electricity supplier liability was bound in a CVA (company voluntary arrangement).
It challenged the orthodoxy that not spending money is going to save money whereas investing a little now could save a lot later. 
The essential point is to distinguish between short term and medium turn benefits and a turnaround forecast is looking at cash flow in the short and medium term rather. It is dealing in reality rather than hope and incorporated into the medium term is the effects of what fundamental change is being made in the short term.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

A Business in Difficulty Can Terminate its Property Leases and be Fair to Landlords

In April 2009 the retailer JJB successfully proposed a CVA designed to save 250 stores and 12,000 jobs. It has become the model for subsequent CVAs in the retail sector.
The proposal included closing 140 unprofitable stores but made available a fund of £10m for the landlord creditors of these premises, equating to a payment of approximately six months rent and JJB also made a significant compromise in bearing the substantial costs of the business rates of the unprofitable stores.
No leases were ‘torn up’ by the CVA and it was left to individual landlords to decide whether they wished to accept a surrender, consent to an assignment or forfeit the lease. The landlords as a group recognised that there was a substantial risk that JJB would go into administration, with a loss of their payments of rent or business rates for the closed stores and appreciated being consulted in a transparent process and being offered a genuine compromise.
It often happens that the core of a struggling business is viable and it need not go into administration if it can be restructured to focus on the parts that are profitable.
That can be beneficial to the creditors too, because they will then see some return on what they are owed, as the above example illustrates. In many cases the creditors will include landlords who own the property or properties from which the business is trading.
The forced termination of a lease can only be done by a liquidator following a company’s liquidation. If a company goes into administration and is sold the Administrator can also force termination of those leases no longer required.
However, in the JJB illustration negotiation with the landlords to terminate some leases was made possible by proving to them how much they would receive in the event of a liquidation and showing that the alternative offer set up using a Company Voluntary Arrangement (CVA) was better than liquidation.
Forcing a change in the terms of a lease is extremely difficult and the courts will want to test whether or not a landlord has been treated fairly as a creditor in a CVA, regarded as vertical and horizontal tests.

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General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

A Winding Up Petition Due to HMRC Arrears Need Not be the End

In early 2010 HMRC (Her Majesty’s Revenue & Customs) served notice for a Winding up Petition against a small trading company. The company had ignored HMRC for three years and had not submitted accounts for three years, not since 2007.  A director attended the winding up hearing in court unrepresented.  He said he was trying to reach agreement with the Revenue and was granted 3 weeks stay of execution.
During the three weeks the company sought our help and experience of turnaround and insolvency, to advise on restructuring options, help develop and implement a rescue plan and also help manage the court process.
After a business review, we concluded that it was possible to buy some time to allow the company to be restructured. We first recommended that a barrister should represent the company at the adjourned hearing.  The barrister successfully sought a six-week adjournment to give time for a rescue plan to be put in place, including proposing a Company Voluntary Arrangement (CVA) for approval at a meeting with creditors. This strategy was achieved and at the third hearing the petition was dismissed.
Winding-up petitions are generally used for two purposes:
They may be used as a final attempt by a legitimate creditor to force the debtor company to respond following previous failed attempts to contact them to try to agree payment terms for the outstanding liability.
They are also used to bully a debtor company into settling an outstanding liability, whether disputed or just to get paid before other creditors.
This second reason is often an abuse of process, where the courts are easily deceived. Procedure in court is often key, especially when experienced creditors who know how to play the court ‘game’ use barristers to deal with innocent directors doing their best to represent the company without expert advice.
Winding up petitions in themselves don’t mean that a company is insolvent but they do indicate underlying issues that have not been addressed. The issues can include a lack of cash to pay bills on time, being unaware of legal process, or a dispute that has been ignored or spilled over into frustration.
The courts are aware of this and tend to be lenient towards directors who ask for time to resolve the petition by granting an adjournment. However, their attitude hardens if, at the adjourned hearing, it is shown that the director has failed to fulfil the undertaking given at the earlier hearing.

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General Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Company Voluntary Arrangements Offer Scope for Saving Insolvent Companies

A CVA (Company Voluntary Arrangement) is a powerful tool for restructuring the liabilities of an insolvent company, but it does not, in itself, save the company unless the business is viable.
It is an agreement between an insolvent company and its creditors. Therefore a thorough business review is also needed to support the CVA by establishing that the business can be profitable in the future.
The arrangement is a legal agreement that protects a company – essentially giving it some time or a breathing space by preventing creditors from attacking it.
It allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed, and allows the company’s  directors to stay in control of the company.
CVAs allow a company to improve cash flow quickly, by removing pressure from tax, VAT and PAYE authorities and other creditors while the CVA is prepared. They can also be used to terminate employment contracts, leases, onerous supply contracts with no immediate cash cost.  It is a relatively inexpensive process.
A company can be protected from an aggressive creditor while a CVA is being proposed and constructed. It can stop legal actions like winding up petitions. In case law, providing a creditor has less than 25% of the overall debts of the company then they can be required to consider the proposal even when a winding up petition is issued.
Ultimately it is also a good arrangement for creditors as they retain a customer and receive a dividend on their debts, which might otherwise be written off in the event of liquidation.
However, it is not a do-it-yourself option for a struggling business but should only be entered into with the help and guidance of an experienced business rescue adviser with the tools and knowledge to help turn around struggling companies.