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R3 Partnership Insolvency

R3 Partnership Insolvency. Company Voluntary Arrangements for Limited Liability Partnerships Keith Steven Turnaround Practitioner Managing Director KSA Group Ltd. Case Study Introduction. “War story” on one of the first CVA’s for a LLP Background to the case

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R3 Partnership Insolvency

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  1. R3 Partnership Insolvency Company Voluntary Arrangements for Limited Liability Partnerships Keith Steven Turnaround Practitioner Managing Director KSA Group Ltd

  2. Case Study Introduction • “War story” on one of the first CVA’s for a LLP • Background to the case • Business is a South East law firm • Expanded into property sales through 5 Estate Agencies & built conveyancing machine • Acquired 2 other law firms to dilute property emphasis • Invested in centralised systems and management • Funded by bank debt and ABL debt • (Asset based lending) • Heavily geared, out of cash www.companyrescue.co.uk

  3. Business Background • LLP had grown from £3m to £5m p.a. by late 2007 • Credit crunch hammered property sales 2008 • Built up losses and legacy debts • HMRC started losing patience (de facto bank!) • Management failings • Sales fell more rapidly than costs • Bank asked for an independent business review • £1.7m exposure on mortgage, overdraft, loans and asset based lending • Facilities maxed out, returned items www.companyrescue.co.uk

  4. Business Structure • Why was this a limited liability partnership (LLP)? • Planned succession from senior team • Modern progressive approach, tax efficient • Business plan to grow to £10m sales, seek exit event • Global events stymied this and led to insolvency • Remember senior parties are “Designated Members” not partners in partnership • Effectively same insolvency options as a Ltd Liability company www.companyrescue.co.uk

  5. IBR Findings • Independent business review general findings • Insolvent business but viable if • Costs cut, debt restructured and management supported • Pre-pack or administration options for restructure limited by • Solicitors Regulation Authority (SRA) intervention risk • High secured lending • Over staffed (TUPE) • Needed to cut fixed costs quickly and reduce overheads www.companyrescue.co.uk

  6. Administration and SRA • Solicitors Regulation Authority (if administration used) • Upon appointment, expected SRA immediate intervention, removal of files and trust accounts • SRA could effect rapid restructure of business to more robust law firm • What would be administration outcome for the bank? • SRA ranks ahead of secured lender’s fixed and floating charges • Asset value collapse debtors, WIP and goodwill disappear • Property fixed charge could possibly repay bank mortgage, but • Bank would see significant shortfall on rest of debts (>80%) • NB: designated members had £650k PG’s secured on homes www.companyrescue.co.uk

  7. Administration and Creditors • Our estimated SOFA showed • Preferential creditors paid in full • 3% “prescribed part” recovery for trade and tax • Deficiency of £2.8m overall • HMRC aggressive due to compliance issues • Failed Time to pay Deals • Threat of winding up petition (WUP) • Trade creditors (60) mounting pressure www.companyrescue.co.uk

  8. Options Available? • Refinance - credit crunch = X • Trade sale – no time for due diligence, high gearing and creditor threats = X • Administration / pre pack = X (SRA issues) • Liquidation = ? • Administration followed by CVA = X • CVA or company voluntary arrangement www.companyrescue.co.uk

  9. Decision Time • Bank did not want to appoint • Bank’s advisors agreed that CVA sensible option • LLP, advisors & bank could not reach agreement • We were asked to set out strategy by LLP • Initial meetings followed by detailed solutions report • Waiting for decision..... • THEN SOMETHING HAPPENED! • HMRC winding up petition issued 23rd July 2008 but then • “Served” on 11th August 2008 www.companyrescue.co.uk

  10. Decision Time • Clock now started ticking to a hearing in late September 2008 • Finally appointed to lead CVA restructure on 14th August 2009 • With statutory notice 3 weeks to build deal • First we persuaded HMRC to stay petition advert • Request to adjourn hearing denied • Creditors meeting had to be held pre-hearing www.companyrescue.co.uk

  11. KSA CVA’s • Company Voluntary Arrangement • High levels of due diligence • Compare all options and assess viability • Build detailed statement of affairs • Build very detailed financial models • Using our bespoke 35mb CVA modelling tool • “What if“ scenario planning • Set out strategies to LLP, bank and advisors • Agree deal and then take to creditors • Typically 2-5 weeks plus statutory notice period • Say 6-9 weeks overall www.companyrescue.co.uk

  12. No time to waste • BUT. This was a new process for us • Company voluntary arrangement for a LLP not • Partnership voluntary arrangement • Or bog standard company VA • CVA has huge flexibility and power • So we set to work & built a rescue deal structure • SRA were approached and agreed not necessary to intervene in CVA www.companyrescue.co.uk

  13. Typical PVA Structure? www.companyrescue.co.uk

  14. HMRC Action • Having issued petition, HMRC collectors would not stay action • We contacted VAS (Voluntary Arrangement Service) • VAS not happy with firm’s poor compliance BUT • VAS agreed to listen, review PVA & linked IVA’s from partners!! • We explained not a PVA but CVA • No IVA’s from partners as designated members • Limited liability www.companyrescue.co.uk

  15. CVA Technical issues (LLP only) • Not a company therefore no corporation tax • Designated members taxed similarly to partners • Self assessment complex to model in business scenario • s214A IA 1986: Adjustment of withdrawals • Similar impact to wrongful reading action v directors • 214A, entitled "Adjustment of withdrawals", to enable a court to order a member to make a contribution if he made withdrawals when he knew or had reasonable grounds for believing that the LLP was or would thereby become insolvent, subject to a defence of there having been objectively a reasonable prospect at that time that the LLP would avoid insolvency. www.companyrescue.co.uk

  16. CVA Deal Structure? • Generally we set 50% of future net profits into scheme • How to calculate profits (re partners losses and gains)? • Five year phased deal with monthly contributions • £1.116m of eligible CVA creditors • Offered to pay £4k pm in year 1 • Total £852k contributions in 60 months • Proposed CVA dividend of 71p in £1 • Bank loans frozen for 12 months (interest only) • 2 Estate agencies closed • Total staff cut by c25 www.companyrescue.co.uk

  17. CVA Deal Structure (cont.) • Introduction of non exec finance director (FCA) • Improved financial and management reporting • Refer to Steve Billot – lawyers often not great at this! • The FD Centre Ltd • Highly experienced quality business oriented CA’s • FCA introduced, now advising LLP • Determined various unwanted lease / HP deals • Standstill agreement on wanted lease/ HP deals • Bank overdraft continued www.companyrescue.co.uk

  18. Benefits for bank? • No SRA intervention in pre-pack • No asset meltdown & crystallisation of loss in administration • No loss of securities or remedies • Improved financial reporting obligatory (FCA) • Supervisor to “police” CVA • Reduction in bank management time • CVA brought end to “circ” – deal has to be done • HMRC Petition withdrawn www.companyrescue.co.uk

  19. Benefits for creditors? • Trade creditors to get dividend plus ongoing trading on cash terms • Retain a future customer • Supervisor oversees CVA contractual obligations • Business must pay future taxes on time • Mitigates costs to state of benefits, redundancy costs • HMRC must get on-time payments in future • Default event if not paid • HMRC will closely examine self assessment returns www.companyrescue.co.uk

  20. Benefits for LLP Members? • Still managing the business • Continue as solicitors, NO IVA’s! • Offset recent losses against previous gains under self assessment • No PG call up, no loss of homes • Remain in control with tighter management & reporting controls • Steadily trade out of troubled waters • Repay creditors who had faith in them www.companyrescue.co.uk

  21. CVA for LLP Summary • CVA’s are powerful consensual solutions for LLP’s • Avoid meltdown, intervention by SRA (for lawyers) • Avoid loss crystallisation for charge holders • Restructure business aggressively, remove fixed, overhead and people costs • Cost effective process v administration • In this case sub £50k for total restructure www.companyrescue.co.uk

  22. Keith Steven & KSA Group Ltd • Keith Steven, MD KSA Group • Involved in CVA led turnaround since 1994, c400 clients • Author of several online guides for distressed business people assisting hundreds thousands people annually • KSA has a team of 20 with 2 insolvency practitioners • Cover the country with 3 offices & a team of regional managers • Learn more about CVA’s and KSA at • www.companyrescue.co.uk www.companyrescue.co.uk

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