Restructuring and Turnarounds using Insolvency Procedures

Labour Saving with a CVA

TMP firmly believes that a Company Voluntary Arrangement (“CVA”) is a flexible and effective tool in the right circumstances.

The directors, unhappy with their existing accountants, approached a new accountant who is familiar with TMP and its specialist knowledge and turnaround expertise.

The business operates in the labour provision market under a specialist gangmaster licence issued by the Gangmasters Licencing Authority (“GLA”), a government department.

Considerations for TMP

  • TMP had to quickly assess if the underlying business was viable. The company was under threat of a winding up petition from HMRC after suffering on-going cash flow difficulties.
  • The company had an excellent reputation with its European customers, having designed and developed a bespoke IT system for their industry. It was important to keep the customers on side and give them reassurance throughout the process as they were particularly sensitive to any form of restructuring of the business.
  • Issues faced by TMP

    • HMRC was a large creditor, therefore it was imperative that they bought into CVA - otherwise no chance of it being approved. TMP negotiated terms which were agreeable to HMRC, resulting in dismissal of the winding up petition.
    • The GLA and HMRC work closely together on any default of companies within this market. It was also therefore essential to ensure that the GLA licencing team were fully apprised of the progress of the CVA. The GLA agreed to continue to support the retention of the licence, without which the company would not have been able to trade.
    • The company had invoice finance in place and at the appropriate time the financiers were informed of the plan to enter a CVA. Despite initial indication of continued support, the facility was quickly withdrawn upon approval of the CVA. TMP worked closely with the company to have a back-up facility in place, as required. However, post CVA, the company has thus far managed to continue to operate without the need for further funding.
    • The company bankers remain in place - no finance facilities were being provided.
    • Outcome

      • The CVA proposal was for a contribution of 70p in the £ over 5 years and was unanimously approved by creditors.
      • The company continues to work hard with its customers to provide additional facilities which may in time lead to an early CVA settlement.
      • The accountant earned a fee for work on cash flows, projections and for supporting the company through the hiatus period – and, most importantly, he retained his client.

        Please contact TMP if you are interested in the turnaround services we offer. As always, we are here to help.

    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.

    Considerations for TMP

    • 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 faced by TMP

  • 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.
  • Corporate Finance Client (NGS)

    NGS, the client, originally approached TMP for funding to acquire a target business (PCB) that provided a specialist binding service.

    The client required £500,000, in part to finance the deal and in part to re-finance existing borrowing and to boost its working capital.

    Considerations for TMP

    A major consideration was whether the business was fundable in its current position. It was already highly geared and its current invoice discounter (“ID”) was looking to reduce the facility or exit from the business entirely.

    The challenge for TMP was to find a solution which:

    • enabled the business to take advantage of the opportunity to add a specialist binding company to complement its own services.
    • whilst restructuring the existing business to enable it to continue to trade and be profitable going forward.

Issues faced by TMP

  • There were a number of stakeholders, all of whom had very different agendas and the challenge was to meet all of their needs whilst maximising creditors’ interests. We had to work together with 4 separate lawyers and 15 separate professionals to pull a deal together within a matter of weeks.
  • It was important to keep all parties informed of the progress and issues and to ensure that all parties worked together to ensure the final deal could be achieved.
  • Valuations of the business and assets had to be obtained quickly - we used specialist agents to do this.
  • It was imperative to ensure that a robust, but short, marketing of the business was undertaken to test the market.
  • The existing ID provider had to be replaced at short notice. This was done by a specialist lender who quickly assessed the position, performed due diligence and placed a £1.2million facility. This was done in less than 3 weeks from first contact.
  • Fixed assets were refinanced by the existing asset based lender, who was happy to support the merged business going forward.
  • Additional working capital was required so a part equity deal was brokered to enable funds to be made available by a specialist lender.
  • The existing directors and shareholder in PBC wished to retire – their exit from the business and corresponding package was imperative to the deal.
  • Outcome

    A restructuring deal was put together such that the target company became the acquiring company. The mechanism was that the business and assets of NGS were purchased by PBC in a reverse takeover, pre-liquidation sale.

    The new ID facility replaced the old facilities in both businesses and the ID provider now provides a facility for the combined business.

    The asset based lender refinanced the assets in the target business, allowing vital cash to be released to effect the deal.

    The shell company of NGS was recently liquidated.

    The businesses were successfully combined and now operate from the original target company’s site under one roof.

    All 54 employees of NGS retained their jobs and are currently working for the combined business PBC. This enabled a significant unemployment saving of over £500,000. The deal used insolvency expertise to maximise creditors’ interests and meet all the stakeholders’ requirements.

    To read the case summary in full please go to www.tmp.co.uk

    Powerplan - Administrators

    Powerplan ran an extended warranty scheme on electrical consumer goods which also provided the consumer with 100% guaranteed cash back if there was no claim on the warranty. The scheme became insolvent as a result of the misapplication of funds that should have been held on trust for the cashback claimants.

    TMP were appointed as Administrators with a complex legal appointment given the multi jurisdictional nature of Powerplan’s legal structure. At the time of our appointment the position looked extremely bleak:

    • There were approximately 750,000 consumers who had taken out the extended warranties – who had paid approximately £90m service payments.
    • The scheme sub-contracted managers had not been paid meaning that there was no operational support at all during the meltdown phase - the claimant information (which was critical) became progressively worse.
    • The repairers’ network set up to provide warranty repairs had collapsed and could no longer provide any service.
    • There were no funds to pay any of the 3 classes of creditors.
      • The cash back claimants
      • The consumers claiming warranty repairs, and
      • The repairers who had repaired prior warranty claims but at the time of the insolvency had not been paid
    • There were also no funds available to run the operational business and to commence recovery work – so we had to carry out the necessary work (see below) entirely at risk.

    Over a three year period we took the following steps:

    • Set up a call centre in London to deal with the massive volume of calls after the business went into insolvency.
    • Set up a court sanctioned scheme where the warranty claimants could claim under a capped repair scheme funded by the warranty repair insurer. This effectively gave warranty claimants approximately 85% return on their claims – which was a massive improvement on their opening position.
    • Recovered funds held in offshore trust accounts.
    • Entered into a voluntary compromise agreement with a major corporate who had originally set the scheme up and subsequently sold the business to a third party.
    • Acquired as part of the voluntary compromise the captive insurance company – which allowed us to commence “look-through” claims to funds held by the captive and its re-insurers.
    • Moved the call centre to Cape Town in South Africa to cut down the administration costs – we believe that this cut the costs by as much as £600,000 to £1,000,000 – which had a very material impact on the returns to creditors.
    • Using the captive insurance company entered into settlements with
      • Trust funds held by the captive that we believed belonged to Powerplan creditors.
      • Re-insurers.

    The net effect of the above is that at the time of writing (Dec 2009) we have managed to get at least a 45% return for creditors from a zero opening position.

    We are currently pursuing additional litigation that we believe may result in higher returns for creditors.

    Global Marine Systems - Administrators; CVA Supervisors; Loan Note Trustees

    Global Marine Systems (GMS) operated a sub-marine cable layer. This was a sophisticated and complex business that had a large workforce and operated 14 large cable laying ships. GMS was one of only 3 businesses in the world that could lay sub-marine cables at the required level of technology. In many ways – this business was (and still) is a world leader.

    The business was sold by Cable and Wireless to Global Crossing for £500m, at the peak of the internet “dot.com” boom when GMS had sales of £525m. However, the whole sector struggled to be profitable and when the dot.com bubble burst the sector experienced massive activity declines yet was burdened with large labour costs and funding obligations on the ships and capital equipment.

    GMS was haemorrhaging cash and Global Crossing attempted over a three year period to negotiate out-of-court compromises with the key major creditors who all had significant leases on ships. These negotiations never reached any acceptable conclusions and Global Crossing (itself in Chapter 11) then tried to sell the business. This, given the financial circumstances was extremely difficult. When one purchaser (who was a major client of one of the Bank creditors) failed to complete, Global Crossing sold GMS to Bridgehouse Capital (a small private equity team).

    Restructuring CS Cable Innovator

    Bridgehouse then resumed negotiations with the key creditors and again failed to reach viable settlement agreements. The position was that:

    • Negotiations had failed – and 2 different management teams had tried to come to compromise agreements and failed – over a 3 year period
      • In fact, some of the creditors where extremely hostile to GMS – this was to make coming to a deal extremely difficult.
    • In particular, the business was burdened with legacy costs that it could – given its current levels of turnover – not afford.
      • GMS had 14 ships under various recurring finance leases, and
      • A large workforce that had been recruited in the glory days when the turnover was £525m – and was far too large for the current turnover of about £80m.
    • To add to the complications – the workforce was represented by 3 different unions.
      • There were very large (defined benefit) pension liabilities to the GMS pension fund that was massively underfunded.
    • There were no prospective sources of additional financing.
    • The business was haemorrhaging cash and had only a few months’ cash resources left before there was no cash.

    But it was not all bad news …

    • GMS was a world leader. It was very highly valued by its client base – all of whom wanted GMS to survive in business.
    • Its operating management team and staff had built up a unique base of skill and experience.

    In summary – our solution was to:

    • Enter into Administration which effectively created a moratorium and protection against unilateral creditors’ action.
      • However, we were strongly of the view that if the Administration lasted too long we would destroy the customer relationships and contracts – and therefore any prospect of an effective turnaround.
    • Allow certain lease creditors to repossess their ships that were not essential to trading.
      • This had the key advantage of reducing the ongoing (unaffordable) lease obligations, yet allow the lease creditors the ability to “deal” with their own assets under their security.
    • Downsize the workforce using the protection of Administration, then
    • Exit from the Administration using a Company Voluntary Arrangement (CVA).

    Implementing this solution was a massively hard battle because of the hostility of the key creditors (not least because the creditors had competing interests). However, we managed to:

    • Exit the Administration within 6 weeks with a CVA which was 100% approved by all classes of creditors
    • Generate a return for the following classes of creditors.
      • Secured creditors – 100% given ongoing contributions from GMS itself.
      • Preferential creditors – 100%
      • Unsecured creditors – 38%
    • Stabilise GMS so that post insolvency it is profitable and thriving.

    A genuinely complex and difficult job – but the results given the circumstances were extraordinary.

    Powerhouse - Administrative Receivers

    Our client, Powerplan (an insurance company), had lent Powerhouse funds under a second charge. Powerhouse was a large electrical goods retailer with a turnover of £300m, but had a long history of marginal financial performance and profitability.

    Very shortly after the second charge was created, the business lost its credit insurance rating meaning that trade creditors would not continue to supply goods to Powerplan (as they would no longer have credit insurance cover).

    This created a domino effect – and the first charge holder appointed an Administrative Receiver to recover its funds, which had only been lent a few weeks before.

    As a consequence, TMP acted as Administrative Receivers for the second charge holders. What made this job complex was that the charges were created in very complex circumstances, meaning that to a certain extent the charge holders where competing with each other (via their appointed receivers) and with the general body of creditors.

    Our challenge was to find out exactly what went on (which was difficult in itself) and then to protect clients rights to ensure that they enjoyed a full recovery.

    After a difficult time, we recovered 100% our client’s funds and the business was sold to an independent third party.

    Orb Group - Administrators

    Orb was a conglomerate that made a number of large real estate investments – and in certain cases invested in business that became tenants to support the property portfolio.

    The entrepreneur behind Orb had managed the business as his personal fiefdom – and had created a large number of intercompany transactions both within the Orb group and also with other companies that he controlled (both on and offshore). This created a financial mess and a paper trail that was impossible to unravel.

    He had created an empire with approximately £100m of property assets funded by an American Investment Bank with £100m exposure and a mixture of operating businesses (turning over approximately £30m) but were marginal in terms of profitability. These operational businesses included Poole Pottery and Seafield Logistics.

    Poole PotterySeafield Logistics

    We were appointed Administrators over the Orb Group – and we implemented the following solution:

    • A pre-packaged buy-out to an unconnected party of the property assets which was sanctioned by Court and also fully supported by the American investment bank – resulting in 100% return to the secured creditors,
    • Proposing a Company Voluntary Arrangement (CVA) for the operating companies.

    One of the major issues of this case was the conduct of the entrepreneur, which we believed to be criminal. Working together with other creditors from his other business interests and The Serious Fraud Office, we collectively assisted in getting the entrepreneur disqualified as a director and jailed for 12 years for fraud.

    We are currently attempting to recover offshore assets for the benefits of the creditors.

    Furniture To Go - Administrators

    A wealthy investor had invested in a warehouse furniture retail concept. He had built the business up to 4 retail stores – but it remained unprofitable and was materially insolvent.

    Furniture to go

    We acted as Administrators implementing the following game plan:

    • Created a moratorium to prevent creditor action.
    • Downsized the business from 4 to 2 warehouses to make the business break even at an operational level.
    • Sold the business and assets to an Australian furniture retail group – Fantastic Furniture, then
    • Exited from the Administration with a Company Voluntary Arrangement (CVA) – which unusually provided both a cash dividend to creditors and a debt / equity swap in the new UK business.

    Southend Property Holdings - Administrators

    Southend was formerly part of a listed property group – the Hampton Trust. Southend was materially insolvent although it owned approximately £75m of property assets – including interests in Arena Central in Birmingham (UK).

    • It had material creditors
      • tax liabilities of between £18m to £20m – that had been incurred over many years with no attempt to pay the liabilities.
      • Debentures of approximately £64m, and
      • Complex and very large intercompany liabilities to its former holding company. However - had little or no audit trail showing how these liabilities arose
    • Very importantly
      • There were large prior transactions that had resulted in assets being transferred out of the Southend Group to the Hampton Trust – without valuable consideration being made for the transaction.

    Our first step was to sell the tangible property assets to a connected party for value but with full sanction of creditors. Our next challenge was to find out the facts of the prior – and potentially voidable - transactions. Once we had established the facts as we saw them – we then entered into very protracted negotiations with the former holding company and its advisors. We needed to prove to them that there was a case to answer and then strike a deal that the materially cash strapped former holding company – yet satisfy the creditors that this was the best deal that could be done.

    We eventually settled on an out of court settlement which obtained 100% of creditor approval - which achieved a material improvement in return to creditors.

    Pixsta Limited

    The partners of TMP were introduced to the management team of Pixsta Limited (“Pixsta”) in early November 2009. 

    Pixsta was an IT company that had researched and developed visual search technology (as opposed to “text” searches). This technology had been implemented in a fashion context – allowing visitors to their website to search a fashion database using images.  A patent application was in progress for this technology.  Pixsta was historically funded through venture capital, although no new finance could be raised through these avenues.

    The directors were aware that at the end of December 2009, their existing funding would run out and from that point on, they could not afford to pay their debts as they fell due. 

    After the initial consultation with TMP, the directors continued to try and raise further finance but by mid-December had run out of options and came back to TMP to investigate alternative solutions - not least of which was to ensure that they were acting according to their fiduciary duties.

    The directors believed that there was a viable business to be rescued.  The business relied on the talent of its staff and the intellectual property that it owned.  Various insolvency procedures were discussed, but the only procedure that allowed for the preservation of the goodwill in the business was a pre-packaged Administration.  Pre-pack administrations allow for a seamless transition from the old business to the new business as the marketing process occurs before the Administration date.

    TMP immediately undertook an aggressive and targeted marketing campaign for the business.  Over the Christmas period, at least five interested parties from across the globe were identified, which included national and international competitors.  TMP embarked on negotiations with the interested parties which eventually resulted in a bidding war and an offer being agreed upon in early January 2010.  The offer received was not only the highest cash offer, but also allowed for the preservation of the jobs of the Pixsta staff. 

    The offer received, together with further realisations from debtors, should result in a significant return to creditors.  This is an infinitely better result for creditors as the alternative to place Pixsta in another insolvency procedure and sell the assets would have resulted in a significantly lower return to creditors.