Summary
A haulage company made a net profit of £120k with a turnover of £3 million in the most recent financial year. Overnight the company had lost a major contract representing 50% of its turnover.
This case was referred by the company’s accountants, the company had 15 employees plus cash at bank of £320k and reserves of £500k.
The challenge
The haulage industry operates on small margins and with a fleet of vehicles financed by loans fixed costs were high, the loss of turnover impacted on profitability therefore the director reluctantly had to make redundancies to reduce costs.
The company was still loss making despite having made redundancies. As such there was a limited time frame to attempt to remedy the situation either by obtaining replacement work to get to at least breakeven or by selling the business to an interested party otherwise the company would become insolvent within a few months.
There were 15 members of long serving staff who would have all had significant claims for redundancy and notice pay. The staff were however in a sector where they could easily obtain another job. The second hand value of the fleet was such that it would not be sufficient to repay the oustanding finance resulting in a claim against the director under personal guarantees.
Our approach
The accountant assisted the director to prepare a 12 week cash flow forecast. This showed that the company could continue to trade for a few months to allow the director to attempt to sell the business and win additional contracts to save jobs. The director with the assistance of the accountant monitored the company’s financial performance and we reviewed the solvency position on a monthly basis.
After three months the director concluded that a sale of the business was unlikely and no additional contracts could be obtained, we advised the director an orderly winding down needed to be actioned.
We introduced specialist employment solicitors to structure a settlement with staff to ensure the company’s solvency whilst also ensuring the staff were paid quickly. We also advised the director on returning the fleet of trucks to the finance companies in an efficient manner to maximise realisations.
The outcome
The director sought advice from a reputable accountant who brought us into the situation as soon as possible. By seeking out early professional advice and taking difficult decisions as and when necesssary the director was able to avoid formal insolvency. Our role was to ensure the director acted within insolvency law in the best interest of the stakeholders – these being the employees, creditors and shareholders.
It would have been easy for an insolvency practitioner to suggest placing the company in creditors’ voluntary liquidation but we thought the right course of action was to assist in an informal winding down of the business resulting in creditors being paid in full, employees obtaining legal advice for an agreed settlement. Usually redundant employees’ would pursue claims through the Redundancy Payments Service (“RPS”) but these were compromised to allow the company to enter a members’ voluntary liquidation and agreed cash settlements were paid so the redundant employees would not have to wait for their individual claims to be paid by the RPS. The drivers were also able to secure new jobs as there was a shortage of drivers locally so would not have received notice pay. The alternative to this settlement was for the company to have entered creditors’ voluntary liquidation which would have resulted in everyone ending up with less.
The added benefit to the director was their personal guarantees were not called.