Here are some insolvency client case studies to help explain the options that could be available to you as a business owner.

We have created a scenario, based on our experience with real clients in similar circumstances in order to explain what a CVA is and how entering a CVA can lead to a positive outcome for a business. Insolvency client case studies can be helpful for business owners to understand the options available to them.

Background

Cheshire Bistro, a well-known restaurant nestled in the heart of Cheshire, had long been a favourite dining destination for locals and visitors alike. However, despite its popularity, the restaurant faced daunting financial challenges that threatened its very existence.

As the restaurant industry evolved, Cheshire Bistro struggled to adapt to changing consumer preferences and economic pressures. Accumulating debts, rent arrears, and dwindling profits pushed the establishment to the brink of insolvency. The situation was further exacerbated by the unforeseen challenges of the COVID-19 pandemic, which hit the hospitality sector particularly hard. The restaurant’s management realised that they needed a comprehensive solution to navigate these turbulent financial waters and prevent the closure of their beloved eatery.

Seeking Assistance

Faced with these mounting financial pressures and the added challenges posed by the pandemic, Cheshire Bistro reached out to Umbrella.UK Insolvency, a reputable firm specialising in insolvency and restructuring solutions. The restaurant’s management was determined to explore every avenue to rescue their business while honoring their commitments to creditors and preserving their reputation in the local community.

Umbrella.UK Insolvency assigned Tom Fox, a seasoned Licensed Insolvency Practitioner, to assess the situation and devise a strategic plan for Cheshire Bistro’s financial recovery. Tom Fox and his team recognised that a Company Voluntary Arrangement (CVA) could provide the necessary framework for the restaurant to restructure its debts and regain financial stability while navigating the unprecedented challenges of the pandemic.

The CVA Journey

With the commitment of Cheshire Bistro’s management and the expertise of Tom Fox, the CVA process began. The first step was to conduct a comprehensive financial review of the restaurant’s operations, taking into account the unique challenges presented by COVID-19. This analysis formed the basis of the proposed CVA.

Tom Fox, reflecting on the process, stated, “Cheshire Bistro faced significant financial challenges, and the impact of the COVID-19 pandemic added an extra layer of complexity. We worked closely with the restaurant’s management to ensure the CVA proposal factored in these challenges, aiming to provide a lifeline for the business while addressing the concerns of creditors.”

The CVA proposal outlined a realistic repayment plan for the restaurant’s outstanding debts, offering creditors a more favourable outcome compared to liquidation. It also included a comprehensive business turnaround plan that considered safety measures, social distancing requirements, and changing consumer behaviour brought about by the pandemic.

Positive Outcomes

With unanimous creditor support, Cheshire Bistro successfully entered into the CVA. Under the guidance of Umbrella.UK Insolvency and the diligent efforts of the restaurant’s management, the business began its journey to financial recovery amidst the ongoing challenges of COVID-19. Over time, Cheshire Bistro implemented operational efficiencies, revamped its menu, and engaged in strategic marketing to adapt to the new normal of dining.

As the restaurant regained its footing, it experienced a resurgence in customer traffic and profitability. The CVA not only helped Cheshire Bistro avoid insolvency but also allowed the establishment to secure its position as a cherished dining destination in Cheshire, even in the face of pandemic-related challenges.

Reflecting on their journey, the restaurant’s management expressed their gratitude for the support they received throughout the CVA process, especially during the unprecedented challenges of COVID-19. They noted, “Umbrella.UK Insolvency and Tom Fox provided invaluable guidance and a lifeline for our restaurant, even in the midst of a global pandemic. Thanks to their expertise, Cheshire Bistro has emerged stronger and more resilient than ever.”

This case study underscores the resilience of businesses and the critical role that strategic insolvency solutions can play in preserving businesses and livelihoods, even when confronted with unprecedented challenges like COVID-19. Cheshire Bistro’s successful turnaround serves as a testament to the power of determination and effective financial restructuring.

This Administration case study showcases the resilience of Guardian Shield Solutions Ltd*. Learn how this company, specialising in security services, faced adversity and successfully emerged with a sound financial foundation.

The Scenario

Guardian Shield Solutions Ltd, a company employing 200 individuals, witnessed a three-year pattern of increasing turnover and net profit. However, a major client’s insolvency led to a £150,000 bad debt, leaving the company financially strained. The situation worsened as the bank reduced their facility by £50,000 in response to the loss caused by the bad debt.

Facing difficulties in meeting PAYE and VAT obligations, HMRC issued a winding-up petition. The directors sought the expertise of an Insolvency Practitioner (IP) just seven days before the scheduled hearing.

Insolvency Practitioner’s Review

Our dedicated Insolvency Practitioner Tom Fox and his team undertook a comprehensive review:

• Analysing the financial history of Guardian Shield Solutions Ltd
• Collaborating on updated profit and loss accounts
• Reviewing existing plans for marketing, operations, and personnel
• Formulating a viable business model with integrated forecasts
• Engaging with stakeholders to understand their perspectives

 Results of the Review

The review demonstrated that Guardian Shield Solutions Ltd could survive if:

• All creditors were frozen
• Overheads aligned with the anticipated lower turnover
• Future management actions defined for marketing, finance, people, and systems
• A concise “Review Report” was produced to guide the next steps.

Collaboration with the Insolvency Practitioner (IP)

In agreement with the Insolvency Practitioner, Umbrella.UK Insolvency, the directors applied to the court for an Administration Order, presenting the adviser’s report. The court granted the order, acknowledging the realistic possibility of a 60 pence in the pound return to creditors compared to less than 10 pence in a liquidation scenario.

IP as Administrator

With the court order, the Insolvency Practitioner assumed the role of Administrator, halting HMRC’s winding-up petition and freezing third-party creditors. Actions were agreed upon, including employee redundancies and a CVA proposal sent to creditors.

Successful CVA Approval

The CVA proposal, requiring Guardian Shield Solutions Ltd to pay £4,000 monthly for four years, was accepted by creditors. The Administrator sought release the day after CVA approval, and the costs were agreed upon during the creditors’ meeting.

Company Return to Directors

With the CVA in place, management control was returned to the directors, marking the successful conclusion of the restructuring process.

*Company name changed for privacy purposes.

After analysing the trading position, it was clear that a CVA wasn’t viable as the company had immediate funding issues and was unable to maintain payments to general trade creditors and key suppliers in addition to the impending threat of enforcement action from the Landlord and HMRC.

Liquidation was not appropriate as this would have resulted in the Company ceasing to trade and thus would have suffered a detrimental impact of its book debt ledger (the Company’s primary asset). This would have likely resulted in considerably reduced realisations for the benefit of creditors.

As the Company had a loyal customer base and there appeared to be an inherent value in the business, Umbrella.UK Insolvency arranged for independent agents to provide a valuation of the company assets on a going concern basis.

Following advice from Umbrella.UK Insolvency, the directors agreed that steps ought to be taken to place the Company into Administration as this outcome represented the best outcome for creditors as a whole and would protect the business from enforcement action.

The protection would allow the business to be preserved whilst the possibility of selling the business as a going concern was explored. It was however recognised that a quick sale, without the need for ongoing trading whilst in administration, would be preferable to allow maximum value to be realised from the Company’s debtor ledger and goodwill.

Management expressed an interest in buying the company assets and business as they were confident of making the business a success with smaller premises and a smaller workforce.

The directors were very worried about the recent bad press concerning pre-packaged administrations, however, Umbrella.UK Insolvency have a wealth of experience in handling such cases and the main route to a successful pre-pack administration is to get professional advice at an early stage from a Licensed Insolvency Practitioner.

In such cases, Umbrella.UK’s Insolvency Practitioner will meet with the directors personally to ensure it is the best advice and make certain the process is implemented correctly right from the outset.

In this scenario, the company entered Administration and all the assets were sold to management for an agreed price of £40,000. The continuity in trade ensured that the Company’s funder was repaid in full from book debt collections. All other company liabilities including HMRC, the Landlord and trade creditors were dealt with by the Administrator and the former directors succeeded with their new company plans.

John and Paul, directors of a consultancy business approached Umbrella.UK Insolvency with debts in excess of £225,000 mainly to HM Revenue and Customs. They had built up their company over a period of 9 years but due to issues in retaining their customers, they were unable to maintain payments to suppliers and in particular the Corporation Tax, VAT and PAYE that was due.

The directors were no longer able to support the company from their own funds and there are no funds left to pay the employees who were owed significant sums.  Furthermore, bailiffs were beginning to knock on the door demanding payments.

After an initial consultation with Umbrella.UK Insolvency, it was clear that the company could not continue to trade in its current form as it was losing money every month that passed.

Restructuring of the company was not a viable option as the business was struggling to keep hold of its paying members and the monthly outgoings could not be squeezed any more.

Therefore, advice was given by Umbrella.UK Insolvency to cease trading immediately. This reduced the risk of the directors being held personally liable for continuing to trade the business when it was to all intents and purposes insolvent. Umbrella.UK Insolvency assisted the directors in the unenviable position of having to inform all staff of the redundancies and the doors were closed. Agents were employed to sell the company assets and the directors found alternative employment.

Employees were happy to find out that under the provisions of the Employment Rights Act 1996 they would receive their entitlement for wages, holiday pay, pay in lieu of notice and redundancy up to certain limits. The directors were also able to make a claim. The bailiffs were not able to take any further action and the Liquidator was appointed to deal with all creditor claims and assets of the company.

The directors had given no personal guarantees and as such the debts of the company including HMRC were dealt with by the Liquidator.

• The Company was an management consultancy business and had traded for around 3 years.
• The Director advised that the company was solvent, able to pay all of its debts, and had traded profitably throughout.
• The company had only two creditors, their accountants and HMRC for Corporation Tax and VAT.
• The assets of the business consisted of approximately £350,000 cash remaining in the company bank account.
• The Director wanted to cease trading the business as he had obtained an employed role elsewhere.
• The Director, who was also the company’s sole shareholder wanted to extract the net funds of £300,000 from the business in the most tax efficient way.
• The director obtained tax advice from his accountant who discussed with him the following options for the company.

Strike off – The option of writing to Companies House to apply for the company to be struck off was discussed. The company would have to pay the outstanding creditors in full and distribute the remaining funds by way of shareholder dividend, following which the company could apply for strike off. However, this would not have been the most tax efficient manner to distribute the funds for the shareholder who was a higher rate tax payer as the rate of income tax payable (32.5%) would have been greater than if the funds were distributed in a Members’ Voluntary Liquidation (MVL) (10%).

Umbrella.UK Insolvency explained the MVL option to the director, who after taking further tax advice from his accountant,  felt that this would be the best option for him and the company. This would allow the company to be formally wound up and also ensure that all creditors were paid in full through the liquidation process. The director was advised by his  tax advisors that an MVL would be the most tax efficient way of extracting funds of £300,000 from the company as this would be regarded as a capital distribution from the liquidation rather than being taxed as income. As a result, he as a shareholder would qualify for Entrepreneurs Relief (10%) on the capital distribution of these funds.

Umbrella.UK Insolvency were duly instructed to administer the MVL process with funds paid out to the shareholder shortly after the liquidation appointment.

John, an IT contractor, had been trading for the past 5 years via his limited company. He was recently notified by his client, however, that due to being caught inside IR35, the end client was no longer able to pass work to him via his limited company. John was able to continue working with the client, however, on the basis that he was paid each week via an umbrella company.

John no longer had any need for his limited company which had reserves of around £100,000.

If John, a higher rate tax payer, had decided to close down the company himself and draw these funds as dividends then his personal tax bill would have been over £30,000.

John, however, decided to close down the company using a MVL process.

Because John was paid the company reserves from the Liquidator, he will be able to benefit from Entrepreneurs’ Relief which will result in a lower personal tax rate of 10%. This will bring his personal tax bill to below £10,000.

If you are unsure what situation your business is in, don’t worry! Call our confidential expert advisers on 0800 611 8888