Company Voluntary Arrangement
The company involved was a manufacturer of specialist light sources and was a leader in its field. Over a short period of time the company experienced a dramatic fall in turnover of more than 50% due to a combination of factors. Without a corresponding reduction in overhead the company was trading at a significant loss. The company took advice and identified the need to reduce the workforce by half in order to survive. However, the company had been trading for 23 years and the majority of the workforce had long periods of service. Consequently the cost of the proposed redundancies was in excess of £60,000. To compound this problem the company received a claim from a former director totalling more than £100,000 which could not be paid.
The Company’s cash flow became increasingly tight and the directors initially sought advice from a national firm of accountants. The directors were advised that the company was insolvent and that it should proceed in to liquidation. This advice was not accepted by the directors who after 23 years did not want to throw in the towel.
The directors were referred to us by their own accountant and we advised them that their business was fundamentally sound but that it just needed to operate on a reduced cost basis until turnover was able to increase.
Although liquidation was an option we felt that the interests of creditors (and the directors reputations) would be best served by saving the company through a Company Voluntary Arrangement.
Prior to presenting proposals it was clear that a large number of redundancies were necessary and so these redundancies took place. The directors made the relevant selections and we assisted in the formalities of declaring the redundancies. Because the company was insolvent and was about to enter into a Company Voluntary Arrangement, the company was not required to pay the employees their due redundancy and pay in lieu of notice claims. These claims became an unsecured claim in the Company Voluntary Arrangement and in these circumstances the Redundancy Payments Office pays the employees.
The company’s overheads now reflected the budgeted turnover and the company’s cash flow forecasts made sense.
The main terms of the Company Voluntary Arrangement were that the company would retain its outstanding book debts as working capital in exchange for paying the value of its assets, which amounted to £364,000, over a three year period.
The benefit to creditors of this was that the assets had been valued on a going concern basis and so the creditors would receive full value as opposed to a forced sale value which would be achieved under liquidation. This would maximise the dividend to creditors which was estimated at 51p in the £. The benefit to the company was that the business would continue, jobs would be saved and the directors would retain their both their company and their reputations.