Business Recovery

Why seeking advice from Sterling Ford may be essential to your business recovery

A few months ago we were approached by the directors of a firm of architects who were facing a winding up petition from HMRC for non-payment of VAT and corporation tax. They had approached a number of other firms of insolvency practitioners who were recommending a pre-pack administration, and therefore, the directors invited Sterling Ford to quote. Whilst our quote including legal fees was between 40-60% cheaper than their other quotes, because we do not as a practice use expensive city firms or even London based firms of solicitors and where necessary minimise any duplication of work between ourselves, solicitors and counsel, we made it very clear to the directors that without an assessment of the actual causes of their company's insolvency, a pre-pack administration may not actually be the most appropriate procedure to adopt. Initially, because they had discussed the Company's position with two other much larger firms of insolvency practitioners, the directors were reluctant to give the go ahead, but when we made it clear that to comply with SIP16 the administrator has to be able to justify a pre-pack administration over alternative procedures from the perspective of creditors and other stakeholders and their respective outcomes, it was not clear from the information the directors presented that the creditors would be better off in an administration than with a creditors' voluntary liquidation. Taking into account that even with our nominal assessment fee, our quote suggested that Sterling Ford were considerably more cost effective than the nearest rival quote, the directors instructed us to proceed.

Upon making our assessment it became clear that the reason why the Company had fallen so far behind with its VAT compliance and hadn't paid any VAT for over twelve months, was because the directors had been drawing back their loan accounts in priority to making payments to HMRC. In view of this we had to explain to the directors that the Company's largest asset, which they had not taken into account in the draft statement of affairs they had prepared to support a pre-pack, was the amount the directors would have to repay or otherwise would be claimed from them in a winding up, which would therefore make a winding up, whether compulsory or voluntary, a far superior procedure, in terms of outcome for creditors to a pre-pack administration. Furthermore, in both the cases of a liquidation and administration, the office holder, i.e. the liquidator and administrator, respectively, would be required to file conduct reports on the directors under the Company Directors Disqualification Act 1986 ("CDDA"), and given what the directors had done, it was most likely if they proceeded with their application for a pre-pack administration, assuming that the court granted the administration order, notwithstanding HMRC's objections, they could still face disqualification proceedings.

Accordingly, the best option for the directors, the Company, their employees and, of course, creditors was a company voluntary arrangement ("CVA"), which would not only allow the company in its existing or alternative structure to continue trading, but would produce an enhanced dividend to creditors, and enable the directors to avoid any conduct enquiries and disqualification proceedings, as supervisors of CVAs are not required to report on the conduct of directors under the CDDA.

 

Workout/Informal arrangement

A few years ago we were instructed to assist the principal catering company providing services to many of the international teams competing in several highly prestigious annual championships. The client company was insolvent due to a lack of financial control, but had extremely good prospects. In view of the very high profile clientele and their high profile sponsors, our advice was that Sterling Ford would reach a negotiated informal agreement with the client company's creditors, so that over a three year period all creditors would be paid in full.

As part of the brief, we were able to reassure the key clients that their caterer was in safe hands and we took over the entire financial operation of the company, putting in very strict financial controls to ensure that the client could meet both its every day commitments as well as make monthly repayments to its old creditors.

We are pleased to confirm that at the end of the three year period all past creditors were paid in full, the financial and accounting function was transferred to the client's accountants and the client restored to financial health.

 

 

Insolvency/Restructuring

 

Pre-Pack Business Sales

Currently the subject of much press discussion, the methodology has been around for a long time and is not confined to Administration. In late November we were asked to advise a French owned UK software and media company based in Leeds, Manchester and London . It was quickly established that the only valuable asset was the business in Manchester which dealt with Advertising & Promotional Media.

The business was advertised and a sale agreed, the contract was signed Christmas Eve on which day notices to a S98 meeting were sent to creditors. The sale was ratified by creditors at the meeting preserving 28 jobs and realising material value for creditors. The structure used was to hive down the business and its assets to a newly formed subsidiary, the shares in which were sold to the new owners, This enabled trade to continue while the rest of the business was closed down in December.

The pre-pack sale can be a valid tool for the avoidance of business interruption which in turn results in the diminution of asset values. The new disclosure requirements will have a cost impact but the enforced clarity will benefit all.

Administration

In our expejrience it is beneficial when accepting an appointment as administrator to be clear about what you intend to achieve with the process. This may be a pre-pack sale, an ordinary business sale, a company voluntary arrangement or an asset sale.

 

Case 1 - We were appointed administrators by creditors to a business selling martial arts equipment and clothing to clubs and the general public. Sales were primarily made on the company's website although more specialised orders were dealt with by telephone. Control of the business was established and trading continued in Administration. Information regarding the business as a potential purchase opportunity was provided to businesses in the same field and agents were appointed. Ultimately the best offer was received from a former director's new limited company which could not fund all of the consideration therefore 30% was paid upfront and the balance over time with the outstanding monies secured by a fixed and floating charge over the company's assets. Preferential and secured creditors will be paid in full with a final dividend to ordinary unsecured creditors.

 

Case 2 - Appointment on a Friday over a small specialist marine stainless product provider came with its own challenges as trading was not possible in administration. Staff were dismissed on the Friday with the administrators assessment and valuation being carried out over the weekend. A director produced sufficient funds to acquire such assets as there were. The business did not trade for a week which generated a high level of interest and orders for goods from the new company. It is interesting to note other businesses in the marina concluded their trades relied to a significant extent on this one. Several businesses placed large orders scheduled over time to ensure the new company would succeed. The successor company trades with fewer employees and trades on a much more targeted basis and while successful still contacts our Portsmouth Office for commercial sanity checks!

 

 

Specialist Insolvencies - Charities & Theatres

Insolvent Charity - Liquidation of a company limited by guarantee/registered charity - Outset Ltd

Outset provided employment and training for disabled people in information technology through a network of 7 centres in London , Luton, Manchester and Wolverhampton. As well as providing IT training, employment service officers were employed who assisted in building their clients self confidence and work-ready skills. Supported work placements were arranged where necessary. A distance learning scheme was also run from Outset's Ealing office.

This charity was forced into liquidation as a result of a move in the goal posts by the Department of Works and Pensions. The charity had been at the forefront of the government's New Deal for Disabled People (NDDP), which funded training and re-training of those disabled in preparation for seeking new jobs through Job Centre Plus. Unfortunately the charity's funding was back-end loaded, with the charity having to carry out its work first and be paid by the government department after the prospective employee had been in a job placement for a specific number of weeks. If the employee failed to complete the placement, then the charity's income was clawed back. This left the charity in a no win situation with many disabled people being left out of work.

After much negotiation with the government department officers on further funds due in accordance with the contracts, which exceeded £1.5m, they claimed a right of set-off against Crown debts. Sterling Ford also successfully negotiated a takeover of the charity's work through another charity.

 

Reported on in "DISABILITY NOW" see:  disabilitynow.org.uk

 

 

 

Insolvent companies limited by guarantee - Theatres

Case 1 - Chequer Meade Arts Centre Trust Limited, East Grinstead

Sterling Ford were called in by the East Grinstead Town Council to seek a way of saving the town's Theatre and Arts Centre. Appeals to the Arts Council, District and County Councils fell on deaf ears. Sterling Ford's initial findings into the cause of the theatre's demise were that apart from funding difficulties, the theatre had been assuming the commercial risk of many of its productions rather than simply hiring out its facilities, earning commission on tickets sold through its box office and cafeteria/bar income. Ultimately, to save the theatre a deal was struck with the Town Council for the continuation of the Theatre and Arts Centre by transferring the undertaking to a new charitable trust, operated by a new company limited by guarantee. The theatre is now running very successfully within this new structure.

To read about Sterling Ford's role in re-establishing the Chequer Mead Theatre and Arts Centre follow link to extracts from Council's minutes below...

 

East Grinstead Council Minutes

 

A number of articles and other press coverage also featured in the East Grinstead Observer, Courier and Brighton Argus

 

 

Case 2 - Arun Arts Limited - Alexandra Theatre , Bognor Regis

Following a winding up order being made against this company upon the petition of the joint supervisors of the company's former failed company voluntary arrangement, we were appointed by the Secretary of State to took a fresh look at what the insolvent theatre company had to offer.

Our view was that this was something worthwhile saving and within weeks we had agreed in principle on a refinancing package. To the creditors' great surprise, we were then able to agree and pay a dividend equivalent to fifty pence in the £ in respect of their aggregate claims. An application was then made to Court to rescind the Winding-up Order, which was granted and we then applied and succeeded in having the theatre's charity status reinstated by the Charity Commission.

This remarkably successful turnaround involving the rescission of the winding up order and the reinstatement of its charitable status had not been achieved before in the UK .

The theatre has since continued to run successfully and profitably. Our senior partner was invited to join the Mayor and local dignitaries at the Grand Reopening Gala Evening

 

Follow links below to read some of the press coverage of this case

http://www.alexandratheatre.co.uk/history.phtml

http://archive.theargus.co.uk/2005/4/20/103574.html

 

 

 

Insolvency Investigations/Litigation Support

One of the most frustrating hurdles an insolvency practitioner has to overcome when bringing civil proceedings is how to deal with the witness evidence of a respondent, the practitioner suspects to be false, but cannot initially prove it. Without evidence to the contrary, the court will usually allow the respondent the benefit of the doubt and the last thing the practitioner would want to face is an adverse costs order for bringing proceedings without just cause. For this reason as much of the enquiry work as possible should be carried out before litigation and if the circumstances permit, direct pre-action contact made with the prospective respondent, with a view to establishing the facts and if appropriate, trying to reach a settlement without the involvement of the court. However, quite often the parties with whom we as practitioners have to deal are dishonest and in order to safeguard their assets, including their homes, albeit to the detriment of their creditors, they will sometimes, in desperation, or as part of a conspiracy, fabricate evidence to either throw us off the trail or derail our attempts altogether to realise the assets concerned. In such circumstances, for an application to succeed, therefore, it may often prove crucial to find evidence, perhaps of an unrelated nature, that will to the court's satisfaction undermine the credibility of that witness's testimony.

 

 

   

Bankruptcy Investigation & Litigation

A few years ago the firm was involved in a bankruptcy case where the bankrupt had over the two preceding decades been a director of numerous companies that had ended up in liquidation leaving altogether several million pounds of debt. The debtor also planned ahead ensuring that a number of properties were purchased by and registered in his wife's sole name. Notwithstanding our extensive and in depth enquiries, we were unable to find any evidence that showed that he had contributed financially to the purchase of these properties. However, there was one exception and that related to a property that was registered in the bankrupt's name, but occupied by his sister and elderly mother. Prior to his bankruptcy, the debtor had submitted a proposal for an IVA, which was rejected by creditors, but nevertheless within the proposal document had disclosed that this property was occupied by his mother and sister on a protected tenancy basis, which had the effect of rendering the property worthless as far as his creditors were concerned. However, after being adjudged bankrupt, the position changed where he explained that whilst registered in his name, he effectively held the property in trust for his sister and mother as they had both contributed to its purchase. The Sterling Ford trustee was concerned that if this were a genuine explanation, the bankrupt would have mentioned it in his IVA proposal only six months earlier. Subsequently, the sister provided evidence showing that the equity proceeds of her former property were used to discharge a creditor who had petitioned for the bankruptcy of her brother several years before the current bankruptcy. In the case of her mother, who, it was claimed had a life interest in the property, evidence was requested to prove that she had paid for the conveyancing costs and stamp duty as had been alleged, but this was never forthcoming. Whilst the sister had proved that she was a creditor, the only document provided by her to show that she had equity in the subject property was a letter bearing an incomplete date, just the month and year after the year in which the property had been purchased, in which the bankrupt confirmed to her that she had equity in the property by virtue of the payment she had made to the third party creditor on his behalf.

Counsel for the Sterling Ford trustee advised that although this letter did appear suspicious, as the bankrupt had given two completely inconsistent explanations as regarded the status of his sister, mother and the property and despite the trustee having evidence to show that the bankrupt had been dishonest in a number of unrelated matters, a court would allow the letter as evidence of the sister's equitable interest in the property. Counsel pointed out that as the sister had actually discharged the previous petitioning creditor and there was no reason to doubt the veracity of her testimony, the trustee's interest in the property was, in counsel's view, only of nominal value.

The Sterling Ford trustee was concerned that this could be a case of dishonest collusion between the bankrupt and the sister to deprive creditors of a recovery and so we set about trying to find evidence of whether the sister had previously colluded with her brother. Fortunately, we came across some former court proceedings, in which there was, according to the transcript, a record that the judge concerned had threatened to refer the bankrupt to the CPS for prosecution for giving false evidence. However, what was significant was that his sister had previously sworn an affidavit in support of her brother's false testimony and therefore, her honesty and integrity were placed in doubt. As soon as this discovery was brought to the attention of the sister and her solicitors, negotiations over the trustee's interest in the property ensued, resulting in a significant recovery for the estate.

Bankruptcy - Investigation/Forensic Accounting & Litigation - Antecedent transactions

Recently, a Sterling Ford insolvency practitioner was instructed to take on, as trustee, the administration of a bankrupt's estate by an NGO who were owed a substantial amount of public money. The bankrupt had been in professional practice and had disappeared abroad after withdrawing several hundred thousand pounds in cash. As part of the recovery process, it was necessary to reconstruct the former practice's accounting records to prove that the firm and hence the bankrupt, had been insolvent six years earlier at which time he had transferred two different properties to different persons, who, whilst known to the bankrupt did not fall within the definition of 'associate' under Insolvency Law. The proceedings taken to set aside these two transactions at an undervalue were ultimately settled satisfactorily through mediation.

 

 

Investigations/Litigation - Proceedings taken by Liquidator against a director for breach of fiduciary duty and the company's solicitor for breach of his duty of care

One of the longest running investigations Sterling Ford has been involved in centred on the misappropriation of £1.4 million by the directors of a company and the recovery ultimately made from the insurers to the company's former solicitors more than seven years after the Sterling Ford liquidator was first appointed by creditors, principally an NGO and HM Revenue & Customs.

The directors of the company constructed a complex web of offshore companies and nominees through whom funds were laundered. Crucial evidence was thought to be held by the directors, various firms of solicitors, accountants and two banks. The concern was how to seize such evidence with minimal notice and the usual 'anton pillar' [search] order was dismissed in favour of bringing in the Metropolitan Police Fraud Squad. However, attempts to interest the Fraud Squad or indeed any of four other investigative/prosecuting authorities initially failed, so steps were taken to persuade the Fraud Squad to change their mind. With the formal opinion of two leading criminal barristers, of whom one also sat as a Recorder in the criminal court, the Fraud Squad changed its mind and subsequently raided the premises of the directors, the various solicitors, accountants and banks concerned.

The Sterling Ford liquidator then obtained an order against the Commissioner of the Metropolitan Police for disclosure of the files and records the Fraud Squad had seized and piece by piece the case was built against the perpetrators. What became clear was that certain professionals' files had been weeded of any incriminating evidence, but as a result of painstaking enquiry, we were able to reveal, using forensic document examiners where appropriate, that one of the key contracts that had been held out by the defendants in support of their innocence, was in fact a forgery, and ultimately managed to obtain the original contract from the securities department of a bank that had inherited the title deeds after as series of subsequent transactions. Although we managed to obtain summary judgment against the principal director for breach of fiduciary duty, it took a further year before the insurers for the solicitor's firm who had acted for the Company, gave in and made an offer in damages and costs that was acceptable after a prolonged mediation.

This case has stood out in terms of its complexity, the significant number of files of evidence there have been and the large number of different applications to court to obtain evidence that was needed to prove the case. Such applications have included those to obtain the assistance of courts in foreign jurisdictions and to demonstrate that in certain cases, public interest in the proper administration of social justice [as it relates to the administration of insolvent estates] should override the public interest in the undisrupted operation of the 'gateway' used by prosecuting/investigative authorities of different jurisdictions, whether subject to a mutual legal assistance treaty or not.

 

 

Investigation, Forensic Accounting & Litigation - Breaches of the Cheque Acts

 

When one of our insolvency practitioners accepted an appointment as liquidator to a former sub-contractor to Motorway Construction contractors for the Department for Transport, little did we know what we had let ourselves in for. We were informed that there had been some book debts to collect, but quickly discovered that the company had had no offices, no records and no staff. It appeared that no clues had been left behind.

On day a call was received from a finance company concerning their claim for the return of heavy road building and maintenance equipment: bulldozers, heavy lifting and earthmoving machinery, with an estimated value of about £400,000.

The next day a call was received from a police officer from the Economic Crime Unit. We were advised of a rendezvous between Northamptonshire and Staffordshire police at a farm in Oxfordshire. A week later police officers handed over three sacks of papers to us which they had recovered from a barn on a farm near Oxford . From the few clues found among these papers so began our investigations into this company, which led to the recovery of hundreds of thousands of pounds from the fraudulent conversion of cheques payable to the company, but diverted, or withdrawn from the company against, as far as we were able to ascertain, in excess of £800,000 worth of bogus invoices.

The case showed up weaknesses in the regulation at the time of the conversion of cheques into cash through cheque exchange/convertor shops, allowing persons unknown to the shop managers to encash cheques for amounts as large as £50,000. During Sterling Ford's investigations, several of the high street banks unwittingly involved in the process, were forced to reimburse the company's estate with hundreds of thousands of pounds.

This firm's investigations were both thorough and expeditious and at times, we were ahead of the police's fraud investigation officers to whom we regularly reported, who in the end instructed us to curtail our investigations, while they prosecuted certain parties. We were subsequently advised that, although the recovery of millions of pounds was being sought by the Sterling Ford team, the overall size of the fraud of which the company in liquidation was just a part, possibly exceeded £60 million. It was also implied that money was being siphoned off for funding terrorist activities and crime officers advised us that we were holding the tip of the tail of the tiger. In this unusual case the liquidator was directed by the prosecuting arm of one of the principal crown creditors, in conjunction with the police to curtail the investigation. With creditors' approval, a reasonable dividend was declared and paid and the case was closed.

Rescission Orders

An incorporated firm of Chartered Accountants was wound up following the presentation of a petition issued by HMRC for non-payment of PAYE and VAT and Sterling Ford were instructed to advise the Directors on their options. Sterling Ford recommended that an application be made within 7 days in accordance with Rule 7.47(4) Insolvency Rules 1986 and paragraph 7.1 of the Insolvency Practice Direction, for the winding up order to be rescinded on the basis that a CVA proposal be placed before creditors. In order to persuade the court that the rescission order should be granted it was necessary to obtain HMRC's agreement in principle to a draft CVA proposal. Sterling Ford prioritised the drafting of the CVA proposal and the application, liaising with the Directors, solicitors and counsel throughout the 6 day window remaining.

By the time HMRC had managed to consider the draft CVA proposal and were willing to support the granting of a rescission order, the hearing of the application was just about to start and there was only time to arrange for HMRC's agreement to be emailed directly to the barrister representing the applicant Directors, and by showing the email on her iphone to the Chief Registrar, the rescission order was duly granted.

 

Company Voluntary Arrangement ("CVA")

CVAs are appropriate where a company has incurred a loss which cannot be financed in the short term however the company is profitable in the medium term. The effect is for the company and creditors to treat unsecured debt as a loan repayable over time.

Case 1 - Having obtained a rescission order [see Rescission Order case study for details] for the client, an incorporated firm of Chartered Accountants who had been wound up by HMRC for non-payment of VAT and PAYE, proposals were drawn up and submitted to HMRC for a CVA providing a lump sum composition to pay a minimum dividend of 71 pence in the £. The proposals were approved but subsequently it became clear that the principal Director of the accounting firm had not taken into account the penalties, surcharges and interest that formed part of HMRC's final claim and some additional creditors not included in the CVA proposal submitted claims, which together drove up the distribution fund required to meet the terms of the CVA.

Six months following the CVA's approval the Directors informed the Sterling Ford supervisor of the CVA that they did not have any further funds available to contribute to the CVA and the supervisor submitted a proposal to vary the terms of the CVA on the basis that creditors received a dividend of 65 pence in the £ instead. HMRC backed the reduced dividend based variation and with unanimous creditor support the distribution was made and the case was closed.

Case 2 - We were introduced to a long standing engineering company specialising in the manufacture of capital goods for the cosmetics industry. The machinery was of excellent quality, some still operating after 30 years, 70% of which was exported however the sector had matured and demand changed from a year round constant level to a 'peaky' replacement cycle.

The company entered administration and our review showed the value in the operation was generated by the machine design process together with associated software control systems. The engineering section was closed and the work outsourced, further redundancies were required in other areas as the business was re-oriented. Subsequently the company was able to achieve 80% of its previous turnover with 50% of the previous staffing level.

One key change was to involve a certain member of the staff with marketing, this gradually produced results as more enquiries were generated and, importantly, dealt with effectively. The company also began to market machine refurbishment packages which produced orders for both spares and work.

The exit route from the administration was a CVA approved by creditors without modification, this spread the debt forward over three years on an interest free basis. The arrangement was not a smooth ride, however following various variations and extensions creditors were paid a dividend of 100p in the £ some three years after the date of approval. The most important element is the initial business review, the result of which sets the parameters for the next few years trading, and the proposal which above all else must be achievable