TMP Case Summary – Creative Design Company

Our client was formed in 1998 as a traditional PR and marketing company. It had more recently been making a transition towards a more creative design base, designing online games and interactive web based applications aimed primarily at the children’s and youth market. Based in Soho, London, the agency designed digital experiences for blue chip clients. Projects included responsive design sites, gamification platforms, interactive content and e-commerce services.

Factors leading to business distress

- Recent turnover had been in the region of £6m per annum over the last 3 years. Forecast turnover for the current year was £1.5m, a dramatic decrease.

- The drop in revenue was compounded by poor previous financial management.

- The substantial reduction in revenue and volume of work resulted in the requirement for significant reduction of their fixed costs in order for the business to remain viable.

- The business was suffering with financial difficulties, and significant unsustainable creditor levels. The company could not pay its debts as and when they fell due.

- The directors instructed a third party to raise finance for the company.

- Due to pressure from the landlord, who threatened to distrain over the company’s assets, the directors no longer had time to sell or raise finance for the business without the protection of Administration.

- The directors were also potentially exposed to wrongful trading had they prolonged this decision.

Issues

- The directors took independent legal advice to protect their positions and to understand their fiduciary and other duties.

- As a result of recent redundancies from its downsizing, the company could not afford to pay these additional liabilities.

- As is common in buy-outs from Administration, the purchaser was reluctant to take on potentially large liabilities of former employees as a result of TUPE legislation.

- The company successfully entered into compromise agreements with four key former employees. These were concluded and settled prior to the company entering Administration.

Outcome

- The directors resolved to place the company into Administration – the business and assets were valued and sold to an independent third party in its sector.

- The purchaser agreed to pay 5% of its net revenues (attributable to the previous company’s clients) for the first 12 months – as well as value for the tangible assets.

- Book debts were excluded from the sale but the purchaser has assisted the Administrator with the debtor collections in return for a 5% collection fee.

- The objective of the administration was to achieve a better result for the company’s creditors on the whole than would be likely if the company were to be wound up. This objective was achieved as a dividend will be paid to unsecured creditors from the realisations made by the Administrator.

- In Liquidation, there would not have been a seamless transfer of the business and returns to creditors would have been poor.

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