2017 August 25 by Sarah Moppett
Due to the confidential nature of our work, we are usually unable to publicise assignments that we have undertaken as a firm. However, KRE have had a successful start to 2017, receiving press coverage on three appointments that we would like to share with you.
Stirling Ackroyd Limited
Stirling Ackroyd Limited is a prestigious chain of estate agents, operating within the Shoreditch area.
When we were engaged by the company late in 2016, their founder had recently passed away, their senior management had been dismissed and there was a winding up petition in place against the company due to HMRC arrears being in excess of £1 million. The easy solution would have been to place the company in Administration, with a distressed sale of the business. The business itself, however, was fundamentally sound and an alternative solution was sought. Despite needing to be sold, a Company Voluntary Arrangement (‘CVA’) was much less destructive to the value of the business. Furthermore, it would allow for a slow and controlled sale process.
We therefore assisted the Executors of the Estate in appointing an entire new management team and persuaded the Company’s bankers to support the strategy and won backing for the CVA from HMRC as well as the company’s other major creditors. Shortly after our appointment, the finance team walked out and we introduced Solutions 4 Business Accountants to take over the finance role and ensure that the business had the necessary working capital to trade whilst being marketed for sale. Spectrum Corporate Finance and the Company’s solicitors, Smithfields, both also played an extremely important part in a difficult process.
As a result, the business was sold after six months of trading at a significant premium, all employment was preserved and it is expected that all creditors will be paid in full. Our confidence in the new management was justified and the performance of Steve Wilson, the new Managing Director of Stirling Ackroyd, and his team exceeded all expectations.
Louche London, JOY
JOY is a well established chain of fashion retailers with over thirty stores in the UK. KRE first became involved as many of the stores were struggling from increased rents and rates, as well as a stagnant retail market. A Company Voluntary Arrangement (‘CVA’) was considered, however, it was deemed unviable.
The business was therefore fully marketed, despite the fact that the management were always the likely purchasers due to their integral role in the design of the company’s products. A sale was concluded via Administration to management, and they are currently trading from fourteen outlets.
This led to a significant amount of employment being preserved, secured creditors being paid in full and a small dividend expected to be paid to unsecured creditors. As described by Retail Week, this decision ‘rescued’ Joy’s, allowing it to continue being a working business. Pre pack sales understandably have many critics, however, this outcome is better than a close down.
Wheatons of Exeter
Wheatons was a long established printing business, which was struggling from over-supply in the market and falling order numbers. As Administrators, KRE were faced with a difficult decision. The options were either an immediate shut down, which would have impacted badly on debtor realisations, or a limited trading period, which would allow time to explore whether a buyer could be found for the business. The latter was pursued and trading was successful with a healthy trading profit, however, there was no appetite for a buyer of the business. Regretfully, Wheaton’s closed down and all employees were eventually made redundant. The trading period, however, ensured a solid debt collection with both secured creditors being paid in full, as well as a possible dividend to unsecured creditors.
We hope that the above demonstrates the positive approach to all situations by KRE and a wide breadth of experience across many industries.
For any further information on our services please do not hesitate to give one of us a call or visit our website: www.krecr.co.uk
2017 March 17 by Sarah Moppett
Whilst the practical implications of Brexit have some way to be resolved for Theresa May and her cabinet, it is fair to say that enough time has elapsed to assess at least some of the impact on UK businesses and their balance sheets. It will most likely be many years before the impact is fully known but one group of businesses and organisations that have been hit especially hard is those operating a Defined Benefit (“DB”) pension scheme.
A DB pension plan is a type of pension plan in which an employer promises a specified pension payment, lump-sum (or combination thereof) on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, DB pension schemes are associated with mainly governmental and public entities, but importantly these affect a great many corporations which often include those that have been previously been part of the public sector.
The key area of the DB pension scheme market affected by Brexit is the way in which pension liabilities are affected by gilt yields. Gilt yields fell and have continued to fall since the Brexit vote and has resulted in the combined liabilities of UK pension schemes rising to an all-time high of £2.3 trillion on 1 July 2016*. To put this into context, this resulted in DB pension scheme deficits rising 12.7%* on 1 July 2016 alone, from £830 billion to £935 billion.
DB pension schemes are required to produce a valuation at least once every three years and the impact of the Brexit result and subsequent effect on gilt yields could have a potentially devastating impact on any schemes where this falls in late 2016 or beyond. Any Scheme Actuary has twelve months from this triennial anniversary to produce the valuation which has to be subsequently represented in any future accounts. This will undoubtedly lead to some difficult negotiations with Trustees and ultimately has the potential to bring solvency of a business or organisation into question. Undoubtedly, some businesses or organisations will face either a major financial re-structure, via either an informal arrangement or an insolvency event, as a result of Brexit impact on their DB pension schemes.
In 2016, KRE Corporate Recovery LLP (“KRE”) were asked to provide advice to a non-profit organisation with in excess of 100 employees. This was an organisation that was part of the public sector until the early part of the 1990s and these employees were pre-dominantly members of a DB pension scheme with long service records. At the stage of taking the initial advice, which came about as a result of the organisation losing a major national contract, the Company’s DB pension deficit stood at approximately £20m.
Paul Ellison and Rob Keyes were ultimately appointed Administrators and, as part of the appointment, were responsible for overseeing the handover of the majority of employees to the new service providers, alongside the wind-down of the organisation’s activities and realisation of the various assets. At the time the final employees were made redundant and the value of the DB pension scheme could be formally assessed, the deficit has risen to £45m, a huge 125% rise from the previously available assessment.
The key advice to any business or organisation in a similar position is to take early advice from a Corporate Recovery professional to understand the full position alongside the future landscape. Ideally, this should take place prior to entering into complex negotiations with Trustees and other stakeholders. Also, directors need to be aware of their own responsibilities with respect to potential claims against them, including wrongful trading. It is also worth noting that the Pensions Regulator will not look kindly on Employers using the Pension Protection Fund as an easy get out from their liabilities and again we would stress the importance of having a professional on your side with respect to any discussions with the regulatory bodies.
Alongside significant experience in dealing with all types of formal and informal corporate recovery events, KRE will work alongside leading pension and legal professionals to ensure that any business or organisation in a similar scenario is given the best advice in all areas of the process and that the interests of all stakeholders, including the pension scheme, employees and other creditors, are properly considered.
* Source: Hymans Robertson (an independent pensions consultancy)
2016 September 9 by Sarah Moppett
Insolvency in the 1980’s and 1990’s was much simpler. Working in those days for a “Big 5” bank panel accountancy firm, you would receive a call from a Bank looking to appoint the old Administrative Receiver to a company. If the company had sufficient assets and potential goodwill value to justify trading, then a Receiver was appointed and the business advertised for sale as the Receivers traded for 3-6 weeks. If trading was likely to result in losses, then more often than not the company went into liquidation and the business closed.
Trading by Receivers was often expensive and Banks unsurprisingly began to look for buyers for the business before making the decision to appoint a Receiver. If the Bank was in a big shortfall position then as the secured creditor the price could in certain circumstances be dictated by the Bank. If no obvious buyer was evident, then the Banks began to engage Insolvency Practitioner (“IP”) firms to look for buyers and the “pre pack insolvency” came into being.
The reason for the walk down memory lane was to point out that there were often good commercial reasons for the pre pack. IP costs were significantly reduced, the business did not deteriorate in a trading insolvency situation, the IP did not have to find funding for the trading period and more often than not a better overall outcome was achieved.
However, where the purchase price was close to a Bank’s the secured debt, then issues arose. The responsible IP sought to protect his position by insisting on appropriate marketing. More often than not the sale was not to a connected party as the secured lender preferred not to risk their Newco lend with the same management.
The real issues began when the process became director led, and in specific industries (printing for example) where the line between pre pack and phoenix became blurred. The outcry from printers who had been in business for many years, paying suppliers, landlords and taxes and then competing against “Phoenix (2002) Limited” was understandable.
The Graham Report published in June 2014, and effective from 2 November 2016 introduced the Pre Pack Pool (PPP”). The PPP are 20 unconnected, impartial and experienced business people who are available, on a voluntary basis, to scrutinise and consider the appropriateness of a connected party’s bid in a pre pack process. The thought process behind the introduction of the PPP was to provide transparency to the process.
There are many criticisms of the process;
- The process is voluntary and it is the connected purchaser rather than the Administrator who makes the submission. The threat is that the Government has reserved the right to ban connected party pre packs outright within the term of this Parliament if the voluntary regime proves ineffectual. Indeed R3 have the view “If the conditions are appropriate, a pre pack can be advantageous for all involved and can be the best way of extracting value from a dire situation” The Graham Report has already concluded that pre packs are a valuable recovery tool, and the threat is unlikely to concern any director looking to reacquire his business in the current regime.
- The PPP will conclude its report giving one of three prescribed opinions;
- Not unreasonable to proceed
- Not unreasonable to proceed but with minor limitations in evidence; or
- Case not made
Duncan Grubb, a director of PPP Limited recently, commented in Recovery Magazine “In Iaymans terms I suppose this could be referred to as a “this is not a stitch up “certificate”. As no reasons or explanations will be given by the PPP to the proposed Administrators for a case not made opinion, this rather flies in the face of the Government’s wider “Transparency and Trust” agenda. Our point is that the criteria is opaque and if Administrators are uncertain then surely stakeholders will also be uncertain.
- By making the purchaser the applicant, we believe that the process is flawed. In order to give an opinion on the appropriateness of a pre pack, surely the PPP will need to understand competing bids, valuations of assets, alternative options, and other considerations known to the Administrators such as better realisations from book debs as a result of business continuity. In a competitive bidding process an Administrator would be negligent in releasing details of other bids and valuations.
The process is still in its infancy and the only information available to date is that since inception, the PPP has been utilised 20 times, involving businesses of varying sizes and sectors, and the opinions in all but three cases were positive (“no reason not to proceed”), with the remaining three being “no reason not to proceed but with minor limitations in evidence provided”. Information on the total number of connected party pre packs is currently being compiled and will be published shortly. Our personal experience is that once directors are aware that the process is voluntary, there is little appetite to embrace it. On three occasions we have traded the business for around 2 weeks whilst marketing the business for sale, and on all three occasions management were successful in the bidding process as the only bidders, mainly because without them there was no business. In truth, the success or not of the PPP process will be difficult to gauge other than if directors do not utilise it in the majority of cases.
Whilst at KRE we will continue to recommend that directors embrace the process, our general opinion is that the process cannot be voluntary, the applicant should be the proposed Administrator, and the PPP needs to be transparent and answerable for its opinions. It is accepted that this will add cost (but not necessary delay) to the process. The fundamental problem is that Administrators have a duty to maximise relations, and in many cases management, if they are key to the business, will make the highest, and sometimes only bid. In contrast regardless of the transparency of the process, creditors and competitors will feel aggrieved when management buy back a business and leave creditors behind.
2016 April 22 by Sarah Moppett
We have now moved to new offices in the heart of Reading – 1st Floor, Hedrich House, 14-16 Cross Street, Reading, RG1 1SN. Our main telephone number hasn’t changed but we have new direct dial numbers, please see below. Would you please update your records. Cross Street runs between Broad Street (opposite John Lewis and with Lloyds Bank on the corner) and Friar Street (opposite Wild Lime and with Haslams on the corner). The entrance to our office is directly opposite the side entrance to Marks & Spencer.
It is also worth mentioning that April 2016 marks exactly 20 years since Paul Ellison set up HMT Recovery in April 1996. Gareth joined in 2000 and Robert joined in 2004, after which RSM Tenon acquired us in July 2007 and we then set up KRE in November 2012. Ian Kings (with whom we worked at RSM Tenon) set up KRE North East in Newcastle in July 2015.
So we have been providing top quality, impartial, partner led, cost effective advice to businesses in the Thames Valley and beyond for the past 20 years, and hopefully for many years to come. If you feel that any of your clients would benefit from an informal introductory conversation with any of us, then please do not hesitate to give us a call.
Tel: 01189 47 90 90
DD: 01189 97 7351
Mobile: 07500 933 022
Tel: 01189 47 90 90
DD: 01189 97 7353
Mobile: 07979 706 392
Tel: 01189 47 90 90
01189 97 7352
Mobile: 07967 471211
2016 January 27 by Sarah Moppett
The deadline for the consultation period to consider significant tax rate increases for shareholders receiving distributions from Members Voluntary Liquidations (“MVL’s”) in certain circumstances expires on 3 February 2016. It is widely expected that the new legislation will be part of the Finance Act 2016 and to come into effect on 6 April 2016.
We highlighted these proposed changes in our December 2015 bulletin attached, and since then the number of MVL appointments for KRE has increased tenfold. We are in the process of distributing literally £millions in order to beat the 6 April 2016 deadline.
If you have clients considering such steps then please advise them to consider acting sooner rather than later. There are sometimes matters which will affect the timing of distributions and therefore the realistic deadline for placing a company into MVL is the end of February 2016 to enable a distribution pre 6 April 2016.
We are happy to have a free consultation meeting to explore whether an accelerative process could be achieved and advisable. If interested please contact Paul Ellison (07967 471211), Gareth Roberts (07979 706 392) or Rob Keyes (07500 933022) as soon as possible.
2015 December 21 by Sarah Moppett
HMRC has published a new consultation paper on company distributions which could significantly increase the tax payable by shareholders on distributions in a Members Voluntary Liquidation.
The general rule in tax law currently allows individual shareholders to receive a distribution in a winding up at the same rate as the Capital Gains Tax rate which can be as low as 10% (if Entrepreneurs’ Relief is available) and will be a maximum of 28%.
Under the new proposals, distributions will generally be charged to Income Tax, with basic rate tax payers paying 7.5% on their distributions, 32.5% for higher rate band tax payers and 38.1% for those within the additional rate band.
The new proposals will apply if any of three conditions are met, which are broadly as follows: –
- “Moneyboxing” – where the shareholders of the company retain profits in excess of the company’s commercial needs in order to receive these profits as capital when the company is liquidated
- “Phoenixism”, where a company enters into a members’ voluntary liquidation and a new company is set up to replace the old and carry on the same, or substantially the same, activities. The shareholder here receives all of the value of the company in a capital form while the trade continues – albeit now in the new company – exactly as before; and
- “Special purpose companies”, where the operations of a business are capable of being divided among separate companies, each undertaking a particular project. The common example here is where SPV’s are set up to develop, build and sell say a block of flats. As each project or contract comes to an end, the SPV company is liquidated and the profits and gains of that project are realised in a capital rather than income form.
The consultation period will run until 3 February 2016 and the new draft legislation is expected to be part of Finance Act 2016 and to apply from 6 April 2016 regardless of whether the liquidation commences before or after that date.
In view of the above, you might wish to make your clients aware of the proposed changes and to consider getting their financial affairs in order to place their company into Members Voluntary Liquidation to take advantage of the current tax regime on distributions before the new tax laws potentially come into effect.
Should you need any assistance in placing any of your clients’ companies into Members Voluntary Liquidation, KRE would be pleased to offer free no obligation advice and can meet to discuss your clients’ needs at a date and venue of your clients’ convenience.
2015 November 18 by Sarah Moppett
For those of you who have not been following the above, the case involves the now in Liquidation Glasgow Rangers company that between 2001 and 2010, used an Employee Benefit Trust (“EBT”) Scheme to pay £47.65m to players and staff in tax free loans.
This was seen by many as the HMRC EBT test case, however a first tier ruling in Rangers favour in 2012 was followed in July 2015 by the same result by the upper-tier tax tribunal. This was particularly frustrating for HMRC as HMRC had run an EBT settlement scheme which closed on 31 July 2015. Under this scheme, businesses that had used EBT’s had to register their intention to settle with HMRC by 31 March 2015, in order to benefit from more favourable terms, and pay up by the end of July 2015. There were no penalties, but now the opportunity has lapsed, EBT users could face fines of 50% or more of the tax due.
The upper tier tribunal gave HMRC leave to appeal to the Court of Sessions and the third leg took place at the beginning of November 2015. Although advisors are divided as to the consequences, HMRC won this leg, as the Court held that Rangers had run a “contrived EBT structure”.
The Court of Sessions judges have issued a very clear ruling that it is “common sense” and “self evident” that payments (to players) were linked to work.
The payments through the EBT were merely “redirection of income” and should have been declared by the employer with tax paid through PAYE. The judges observed, caustically, that the principle is so glaringly simple and straightforward that it seems to have been overlooked by the two prior tax tribunals.
Supporters of EBT’s have poured cold water on the result, arguing effectively that the Court upheld the principles of EBT’s being legal, however Rangers simply got it wrong in the implementation. The key issues seem to be that the EBT payments must be discretionary and not contracted in contracts of employment. In hindsight it is difficult to envisage a player’s agent agreeing to any contract where the majority of his clients income will be discretionary.
The Administrators of Rangers now face the decision whether to take the matter further to the Supreme Court. If they do not then the majority of £24m recovered from a settlement with Rangers solicitors, will go to HMRC whose claim, including the EBT PAYE, is in the region of £60 million. Many will argue that this will resolve little as supporters of EBT’s will continue to argue that EBT’s work in general, however it is Rangers EBT’s that did not.
At KRE we have dealt with several companies facing EBT issues. In one instance we were able to assist in the settlement with HMRC prior to the 31 July 2015 deadline. In another case the company simply did not have the funds to fight and it was sold as a going concern through an Administration process. Each case must be considered on its merits and much may depend upon the actual operation of the EBT schemes.
If you have clients affected by the above then we are happy to discuss on a confidential and initial no charge basis.
2015 November 9 by Sarah Moppett
You may recall we wrote to you back in February 2014 with the state of play at that time. Since then, there has been further detailed consideration of Pre-Packs, culminating in the so called “Graham Review” instigated by the Government.
By way of a brief reminder, a Pre-Pack refers to an arrangement under which a sale of all or part of a company’s business and assets is negotiated with a purchaser prior to the appointment of an Administrator, and the Administrator effects the sale immediately on, or very shortly after, his appointment.
We consider that Pre-Packs are a valuable rescue mechanism in the right circumstances but they have come in for a great deal of criticism recently, in particular when the sale is to a connected party eg management.
As a consequence, the Graham Review came up with a number of recommendations which form part of a new Statement of Insolvency Practice 16 (“SIP16”), a copy of which is attached. This now forms the best practice for our profession, and it would be a bold (perhaps foolish) Insolvency Practitioner who ignores it in its entirety. Businesses
The two key changes to previous practice, which particularly affect sales to connected parties, are the use of the Pre-Pack Pool and Marketing Essentials.
Pre Pack Pool (“Pool”)
The prospective purchaser, where a connected party is involved, may make an application to the Pool via a secure, online portal. Based on the information submitted, the independent Pool reviewer will issue one of three opinions:
- The pre-pack is not unreasonable
- The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided
- Case for pre-pack has not been made out
The Pool, operated by Pre-pack Pool Limited, works on a user-pays principle. The process will cost £800 plus VAT per application.
Insolvency practitioners will need to make sure that connected parties considering acquiring a company’s business or assets through a pre-pack purchase are aware of their ability to approach the Pool. The process is aimed to encourage applicants to agree to the opinion being sent to the Administrator or intended Administrator automatically.
The website at www.prepackpool.co.uk includes a number of anticipated questions and answers about the operation of the Pool.
The Administrator should disclose in his SIP16 report to creditors which must be issued within 7 days of completion of the sale whether the Pool was approached by the connected party, or not. If it was approached then a copy of the opinion of the Pool should also be included in the SIP 16 report.
The prospective Administrator should also request that the connected party conduct a viability review and prepare a viability statement. The Administrator should disclose the statement in his SIP16 report or state that it has not been obtained, as applicable. Again, the connected party is not obliged to conduct a viability review.
It remains to be seen how many connected parties make an application to the Pre-Pack Pool and/or prepare a viability statement. And it isn’t clear what the effect of a connected party (i) not making an application and/or (ii) being given a ‘no’ but wishing to carry on regardless. The purpose behind it is clearly an attempt to improve stakeholder confidence in the process but it is voluntary, so it will be interesting to see the reaction of connected parties when told about it.
SIP 16 now sets out a list of ‘marketing essentials’ in its Appendix, which the Administrator is obliged to consider. These ‘marketing essentials’ are:
- Broadcast – to make the business’ availability known to the widest group of potential purchasers
- Justify the marketing strategy – to explain to creditors what the reasons are for the marketing and media strategy used
- Independence – the Administrator should be satisfied of the adequacy and independence of any marketing, particularly where the business has been marketed prior to his/her appointment
- Publicise rather than simply publish – marketing should be for an appropriate length of time and creditors provided with reasoning for the length chosen
- Connectivity – include online marketing and media by default, or justify if not used, and
- Comply or explain – particularly where sales are to connected parties, an explanation should be provided as to how the marketing achieved the best outcome for creditors as a whole.
The marketing essentials aim to answer critics of the Pre-Pack process who have made the point that a lack of proper marketing and explanation to creditors of the steps taken prior to a Pre-Pack being completed meant that creditors were often unable to determine if the best deal had been done.
However, there will be occasions where for reasons of time and/or confidentiality, it will be difficult to market a business widely or even at all and therefore there will be times when the new marketing essentials may be difficult to achieve.
Only time will tell whether these new principles make any difference but what is clear is the threat from Government of the possibility of introducing a mandatory requirement to conform if this voluntary scheme is widely ignored. How a mandatory scheme might work is another question altogether!
Notwithstanding the changes above, KRE believe that Pre-Packs will continue to offer a valuable rescue mechanism and each will be viewed by us on its merits as has always been the case but it is even more important than ever that management takes early advice on the best course of action to ensure that if a Pre-Pack is being contemplated, sufficient time is available to consider the new protocols and requirements.
2015 October 19 by Sarah Moppett
KRE Corporate Recovery LLP is delighted to announce that with, effect from 3 August 2015, we will be opening up an office in the North East, KRE (North East) Limited, to give us truly national coverage.
KRE Corporate Recovery LLP has reached agreement with ex-RSM Tenon colleague Ian Kings to set up and run a fully-manned office on the outskirts of Newcastle. Paul Ellison commented: “I have personally known and worked with Ian from 1986 to 1992 and then from 2007 to 2012. He is a like-minded individual and has a fantastic track record over the years. We will be helping him in the initial set-up and when needed can support him with our Reading staff; however our three partners will remain totally focused on our Reading business and this will very much be Ian’s business. We all wish him well and know that he will be a valuable addition to the firm.”
Ian Kings commented: “I have enjoyed my time at RSM Tenon and Baker Tilly; however the time is now right to be in control of my own destiny and I am looking forward to the new challenge. I would like to thank the Baker Tilly partners for their understanding and wish the Firm and my ex-colleagues every success in the future.”
Paul Ellison, Gareth Roberts & Rob Keyes
KRE Corporate Recovery LLP
2015 April 29 by Sarah Moppett
At the outset of the recession in 2008 doom and gloom headlines predicted “crunch time for charities” (Sunday Times 2008), and charities facing “£2.3bn black hole” (Guardian 2008). Yet seven years on the gloom merchants were thankfully wrong, and in general there have been few high profile collapses.
The basis of the concern was simple. Recession means less disposable income, and charitable donations are one of the easiest modes of expenditure to cut. There are other issues however facing charities and the four that we have acted for recently illustrate some of these issues.
Case Study 1 – Outside Trust
The Outside Trust was an unincorporated charity funded by donations and income from a working farm. The Trust owned the farm and visitor centre, and was financed by a Bank loan of £1 million. The Trust ran outward bound days for underprivileged and disadvantaged children from urban locations.
The issue was that the charity could not attract sufficient general donations to service the farm costs and overdraft interest. The Trust received many restricted use funds for specific projects; however these were ring-fenced.
A sale of the farm would be sufficient to repay the Bank but would not be sufficient to repay all creditors in full. As the Trust was unincorporated the Trustees faced personal liability for the shortfall. Administration and Liquidation procedures were also not available to the unincorporated Trust.
Our solution was to write to all of the donors explaining the position and requesting their agreement to waive any claims against the Trust.
The majority of donors were agreeable to this. We then wrote to all remaining creditors explaining that formal insolvency procedures could not be applied and that after the sale of the farm, there would only be sufficient funds available to pay 80p in the £ to unsecured creditors. We further stated they should take their own advice regarding the remaining 20p. The farm was then sold, creditors were paid 80p and no creditors chose to pursue the trustees.
Case Study 2 – Educational Trust
We were engaged by the Trustees of a charity which provided statistical tools and analysis to educational establishments. The Trustees requested advice from us on their responsibilities and obligations under the provisions of the Companies Act 2006 and the Insolvency Act 1986. The charity was a company limited by guarantee.
The charity, which had been in existence for twenty years, traditionally made a small annual trading loss, funded by donor contributions, but it faced a significant deficit on its employees’ final salary pension scheme which rendered the company insolvent on a balance sheet basis (liabilities exceeded assets) and the Trustees knew that the charity would be unable to meet any request for additional contributions from the pension scheme.
Efforts had been made to sell the company (as the core business was attractive to competitors) but the size of the pension scheme deficit put interested parties off.
The first thing we did was to meet with the pension scheme to discuss the possibility of ring-fencing the scheme to enable the business to continue but after we had reviewed the charity’s forecasts it was clear that the business was unlikely to generate sufficient surplus funds in the short to medium term to address the deficit, so this was not a realistic option.
This meant that the formal insolvency of the charity was inevitable. We felt that the core business would be of interest to third parties, so we advised the Trustees to proceed into Administration rather than Liquidation, which would have resulted in the closure of the business.
We then set about identifying potential purchasers for the business. This was an unusual case in that the key employees were not prepared to work for a commercial organisation, only another charity. This limited the number of potential buyers but we were able to agree terms with another charity for the acquisition of the business and assets and we eventually completed the sale, safeguarding the jobs of all employees and providing continuity of business to its former clients.
Case Study 3 – Mental Health Charity
We were engaged to advise a mental health Trust which was struggling to meet its recently increased leasehold property costs. There was a solution to vacate part of the premises if the landlord would agree, however the Trust was tied into the lease for a further 10 years.
Our solution was to write to the landlord explaining that the Trust was unable to continue to trade under the present lease, and setting out the minimal return that the landlord would receive if the Trust was liquidated. We compared this to the income that the landlord would continue to receive from the part occupation. The landlord agreed to the partial surrender of the lease and the charity continues to this day.
Case Study 4 – Berkshire Age Concern
We were engaged to advise when this charity, having lost 50% of its government funding, had exhausted its resources and faced real issues of being able to pay monthly salaries. Whilst the charity was building up its private residents to replace government funded residents, there was a funding gap over the next 12-18 months.
We immediately arranged meetings with the local authority to outline the problems and issues, and in effect explain that unless they were able to assist, the centre would close and our problems would become their problems.
We negotiated funding and the running of the centre was taken over with the full agreement of all of the Trustees. The centre continues to provide services for the elderly community in the locality.
Four cases and in only one was a formal insolvency procedure implemented. Lateral thinking and persuasive negotiation on the others has meant that three of the four continue to provide their services in a restructured form. Our website states “An insolvency process is not necessarily the end” and our recent work in the charity sector demonstrates this.