Case Study: IT Specialist

With problems on a major contract that would cause heavy losses, additional investment was required to finish it to avoid even more significant penalties for non-delivery of the project. Opus guided the Directors through a restructuring exercise and the approval of a CVA.

CASE STUDY IT Specialist – How persistence paid off in a CVA

Company Voluntary Arrangements (CVAs) are a useful business rescue tool, but too often they stumble at the first hurdle when the assumptions upon which they are based fall foul of a bitter dose of commercial reality.

Nevertheless, with careful management of creditor expectations and some skilled exploitation of the remarkable flexibility of the procedure, even the severe negative impact of the Covid-19 pandemic can be overcome and a positive outcome achieved in the end.

The problem

The Company is a respected and successful digital transformation and IT specialist, established since the early 2000s and providing solutions across a number of applications and industries. Unfortunately, in 2018 it ran into problems on a major contract. Not only would the contract cause heavy losses, but additional investment was required to finish it to avoid even more significant penalties for non-delivery of the project. By October 2018, it had become clear that these extra financial resources could not be secured. Opus had been introduced to the Company earlier that year by its accountants, who were concerned about its survival.

The financial position

The company’s main asset was a significant debt due from an associated company, which was also the landlord of the Company’s premises in London. The repayment of this debt was wholly dependent on the price achieved by the landlord for the sale of the property. If the Company went into Liquidation, the rent on the property could not be paid and the debt to the mortgagee could not be serviced, risking a forced sale potentially at a much lower value.

The initial CVA proposal

Under the guidance of Opus first as Nominees and then as CVA Supervisors, the Company went through a restructuring exercise and a CVA was approved in December 2018 to facilitate the sale of the property which it was anticipated could be completed within twelve months. Pending the sale, the Company agreed to make regular contributions from its ongoing turnover. The time frame set for completion of the CVA was between 12 and 18 months.

The CVA called for a minimum dividend of 50p to be paid to creditors, who included two significant contingent claims, one for the damages element under the loss-making contract and another from HMRC in relation to tax schemes previously entered into by the Company.

The first variation

There was initial interest in the property, but sale negotiations became protracted and in February 2020 the CVA was extended from 12-18 months to 18-24 months by agreement with the creditors.

Coronavirus and the second variation

Unfortunately, when Covid-19 hit in March 2020 it severely affected interest in London commercial property. In November 2020 the CVA was extended once again with a long-stop date for the property being entered into an auction if a sale could not be achieved.

Sale of the property

The property sale was finally completed in July 2021, allowing the inter-company debt of some £1.4m to be repaid in full. At this stage, the HMRC contingent claim arising from the tax schemes and other debts were agreed.

The third and final variation

The remaining issues in the CVA were the agreement of the contractual damages claim and the amount of the final dividend to be paid to creditors. A further meeting of creditors was held in December 2021, which approved acceptance of the damages claim without the further cost and potential delay of an adjudication process.

The size of the two contingent claims was such that the minimum dividend set initially in the CVA was no longer achievable, so the creditors agreed at this meeting to remove this restriction. The alternative would have been the failure of the CVA and an enforced Liquidation of the Company, ending its business and destroying jobs.

Completion of the CVA

In early 2022 a first and final dividend to creditors estimated at 29p in the £ will be paid and the CVA successfully completed, the company surviving and creditors receiving a significant dividend.

Jo Rolls, Partner at Opus and the lead CVA Supervisor commented:

This successful outcome is the direct result of the flexibility provided by the CVA provisions in the insolvency legislation and the willingness of the creditors to allow the Supervisors to extend and amend the CVA to take account of changing circumstances, which were outside the control of the Company. The survival of the Company to continue trading and provide employment is a truly gratifying result for all interested parties.

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