Restructuring and Turnarounds using Insolvency Procedures
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).
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.
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.
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.