Reasons for the difficulties

Our client is a specialist sport clothing supplier company with distribution agreements with two leading international manufacturers. It encountered financial difficulties due to a combination of factors. Due to the UK leaving the European Union it became very difficult to sell outside of the UK. It then focused on the UK and then of course Covid lockdowns meant that their market was challenged.

However, when the UK finally left the European Union, the team struggled with the paperwork that the shipment companies required to move the goods to the Company’s customers. There were also issues with increased customs and duty charges, which customers were not happy with. Due to this, the Company lost almost all business with customers outside the UK. Brexit also impacted the businesses purchasing pattern.

The Company’s largest supplier was based in Italy, so it was quick and easy to get goods directly from them. After Brexit this was more challenging which meant that more had to be bought directly from the factories in Asia. Buying from the factory directly meant that the Company had reduced terms and much longer lead times on goods which impacted cash flow.

For some unknown reason the company’s sales & purchasing manager ordered way too much stock. When they approached KSA for assistance in 2023 the company had over £5.2m of stock at wholesale levels. Loans were taken by the company to fund the stock purchases and the business, which thrived during Covid lockdown, but has dropped to pre Covid levels, it was in early 23 struggling to meet the loan repayments.

Additionally, a large customer, which owed the company £105k went into administration. This severely impacted upon cash. At the same time the company also has an unaffordable HMRC time to pay arrangement which was putting additional pressures on cashflow.

The board identified that these problems were beyond their ability to deal with and their accountants didn’t have the specialist turnaround and insolvency knowledge required, either. They decided to seek help and advice from turnaround professionals to try and deal with the resultant cashflow pressures. After reading about the rescue options on www.companyrescue.co.uk the managing director contacted KSA Group.

What KSA Group did

KSA group had meetings with the company to discuss what its options were.  After analysing the company’s accounts, preparing quick forecasts and assessing the overall business situation it was decided that a company voluntary arrangement would be the best option.  Liquidation would have led to a sharp reduction in asset values, loss of trade 30 jobs. A prepack administration was unlikely to be successful as the company was unable to assign the distribution contracts with international manufacturers.

Following negotiations with creditors and funders and ensuring that the company could sustain it the deal structure KSA helped the company to prepare was as follows.

The company will pay creditors £1.05m+ over 5 years. Included in this amount is an amount of £14k, in respect of the balance on the directors’ loan accounts. It is proposed that the directors will repay this amount over the first 12 months of the CVA at a cumulative amount of £1.2k per month.

Sales are forecast to be £2.4m, in the first 12 months of the CVA period. Obviously this marks a sharp reduction after the loss of two distribution agreements, but the company has sharply reduced it warehousing space, suing terms in the CVA to terminate some of its property lease obligations.

2 employees are to be made redundant at no cost to the company using the CVA process and 9 jobs would be saved. So although a much smaller business it is running profitably now.

Secured Creditors:

KSA ensured that the secured creditors were onboard and discussions with the factoring provider were led by KSA to ensure the continuation of the invoice finance facility to the company and the funder was fully apprised of the situation, and of the other (less welcome)  options such as liquidation and administration. The funder wanted to continue to support this family business through a  tough time.

HMRC will receive 100p in £1 over the next 3 years and the unsecured creditors will receive 42p in £1.

KSA Notes:

If you are a director of (or advise) a wholesaler, distributor or even a  retailer/ online retailer facing cashflow difficulties start talking to KSA soon. We are seeing HMRC building collection pressure where VAT and PAYE are in arrears and sending in HMRC field officers and issuing winding up petitions 0 such WUPs have increased by 75% this year.

Most lenders and invoice finance providers are very keen to support well thought through restructuring plans even if there are time to pay deals win place with creditors like HMRC. Often using a quality CVA proposal to restructure debt presents a better outcome for creditors than terminal insolvency.

Obviously the directors need to be determined to make the restructuring work and to drive the recovery. In this case the directors were family members, and the business was a long standing successful company in its field.  With a carefully constructed turnaround plan, our expert turnaround and insolvency advisors helped them build a CVA proposal that had a very strong chance of being approved by creditors. The CVA was, indeed, approved by creditors in August 2023.

Remember KSA can assist viable business with serious cashflow or structural/market problems to survive and recover. We can liaise with all creditors, HMRC and landlords to build a consensual workout that maximises recovery for creditors, whilst always leaving the company under the board’s control.