Buying Back the Assets – Not Always the Simplest Solution!
Expert Chris Brown looks at how liquidating and buying back the assets can go wrong for the directors or shareholders
In February I was introduced to a company which manufactured sandwiches and distributed them via a van sales operation to retail outlets on a sale or return basis. The company was losing money, had breached its overdraft limit and was running out of cash. The company had assets worth £20,000 on liquidation and liabilities of £180,000 (£92,000 owed to the bank). On the face of it liquidating and buying back the assets would seem the obvious solution. However, doing so would have serious consequences for the directors who had given personal guarantees to the bank. The directors, who were in their mid to late 50’s, had no funds to either settle their guarantees or buy back the assets and so faced losing their house and well as their income were the company to fail.
Having discussed the options available, a Company Voluntary Arrangement (CVA) was the preferred solution as it would enable the company to continue trading and service the banks debt which was secured by a debenture. However, for a CVA to work the company had to be profitable and be able to make income payments. Working with the company’s accountant, a plan was put in place to rationalise the business and return it to profitability. The plan involved reducing production and deliveries from five to three days a week thus saving significant costs without unduly affecting turnover.
Support of the bank was vital and so with the director I met with the bank manager and presented an outline of the CVA proposal. The bank indicated their support and so the CVA proposal was developed further. As the proposal was being finalised the directors were advised to speak to the main trade creditors. Although these meetings were uncomfortable for the directors, the creditors involved appreciated the fact that the directors had taken the trouble to see them and this helped gain their support. At the formal meeting of creditors the CVA was approved by all the creditors who voted.
The CVA was structured so that the company will pay income payments for a period of five years based on what it can afford to pay having taking into account the servicing of the bank debt. In fact during the five year period the company’s loans and overdraft will be repaid in full so that at the end the company will be debt free and the directors will have time to generate funds for their retirement.
This Buying Back the Assets article was written by Chris Brown, of UK200Group member firm Hart Shaw LLP