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Pension Schemes Post Brexit – Uncertainty for Employers in 2017

2017 March 17 by

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)

An IP’s perspective of the Pre Pack Pool

2016 September 9 by

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.


2015 December 21 by

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.

Challenges Facing Law Firms

2013 November 11 by

For as long as most of us can remember, law firms did not hit the insolvency headlines other than perhaps for acting for Administrators or Receivers on high profile cases.  However, as with many sectors, in the last 5 years the world has changed, such that the insolvency of a high profile law firm doesn’t now even make the headlines.

Halliwells,Challinors Cobbetts, Manches and Harris Cartier are but a few of the recent casualties and the general concern is that other well known brands will follow.  A recent survey by our trade body R3 estimated that 31% of all law firms (2,556 practices) are at risk of failure, with the situation worse in London.  In this article we look at the combination of factors which have contributed to this worrying state of affairs.

Changes in availability of funding

Banks traditionally have been very willing to lend to law firms, often on an unsecured basis, in order to attract substantial deposit balances and spin off customers from the firms clients.  In addition there were historically no larger firm failures and the lending was considered to be  low risk.  The parameters have changed and law practices are now assessed on the same basis as every other business, focussing on profitability, serviceability and security.

Alternative Business Structures (“ABS’s”)

The Co-op, SAGA and the AA are the first major consumer brands to announce that they will start offering legal services following the approval of ABS licences by the Solicitors Regulation Authority (“SRA”).  The AA, a breakdown, recovery and insurance specialist, has entered into a joint venture agreement with law firm Lyon Davidson to create AA Law.  New substantial entrants into a market already suffering from oversupply will inevitably result in fallout.

Market changes

Significant changes to the legal aid system in England and Wales came into effect on 1 April 2013, as part of a plan to reform the system and save £350 million a year.  Also effective from April 2013 is the banning of referral fees in relation to personal injury claims, as well as changes in the recoverability of conditional fee arrangement (“CFA”) fees.  These changes will have substantial short and medium term impact upon many specialist practices.

PI Insurance

The insolvencies of PI insurers Balva Lemma and Quinn between June 2012 and January 2013 left over 2,000 firms seeking alternative PI insurance.  This is compounded by the 1 October 2013 deadline for law firms to renew insurance in a very wary market.  Insurers are required by the SRA to provide 6 years run off cover to law firms, irrespective of whether the firm is able to pay the premium.  Typically this is 3-3.5 times the annual premium.

The consequences of this are that on 1 October the SRA were notified by 263 firms that they had been unable to obtain PI insurance.  Firms have until 31 October to obtain cover failing which they must not take on further clients and take action to close the business by 31 December.  As at 31 October 2013 there were still 175 law firms without PI cover who are now either frantically seeking cover at any cost or taking steps to cease to trade.

Whilst commentators were predicting significantly higher numbers, there is the hidden issue of significantly higher premiums (some up to 40% increases) which may not be sustainable.

Outdated operating structures

The ratio of fee earners to support staff will vary significantly, a major factor being the type of work undertaken by the practice.  Company commercial work tends to require very low levels of support staff, compared to the higher levels required for residential conveyancing and personal wills trusts and probate.  However many practices have support level ratios of between 2 and 3 to every fee earner and it is often senior partners reluctance to engage charge which prevent inefficiencies being eradicated.

Restrictions on restructuring

There are certain barriers unique to the legal profession which prevent traditional insolvency restructuring, such as;

i)  An acquiring firm runs the risk of being deemed to be a “successor practice” and as such will inherit any legacy claims against the firm being acquired.  This can be so prohibitive as to render the practice unsalable;

ii) Law firms cannot be traded in Administration by an Administrator who is not a qualified solicitor; and

iii)Client confidentiality in relation to client files is prohibitive to extensive due diligence by a potential purchaser.

The Future

The top 10 largest UK law firms reported average profit per partner of £1 million, up 6.1% on 2012.  There is an increasing gap of the so called top tier and mid tier firms – average profit per partner within the top 11-25 fell to £448,000 from £481,000, despite fee income rising by almost 9.7% as smaller firms rushed to consolidate.  The gap between the best and worst performing firms is widening further and the clear message is that unless these firms can radically restructure their businesses, the trend of law firm failures is likely to continue.


What is the Prescribed Part in an Insolvency?

2013 March 25 by



The corporate provisions of the Enterprise Act 2002 were brought into force on 15 September 2003.  From that date the order of priority as to “who gets what” in an insolvency was changed.

Shortly prior to this, case law held that banks could no longer have a fixed charge on book debts (“Brumark”), and therefore the order of priority in an insolvency has radically changed over the past 10 years.  This is of particular importance to directors who have given personal guarantees for Bank facilities, in the event of a formal insolvency.

Priority pre 15 September 2003

The order of priority pre 15 September 2003 was generally as follows;

  • Secured creditors having a fixed charge on most company assets including property and book debts, ie all proceeds paid to them;
  • Preferential creditors ranked first on floating charge assets eg stock, and this included HMRC for arrears of VAT (6 months) and PAYE/NIC (12 months);
  • Secured creditors for any residual debts under floating charges; and
  • Unsecured creditors such as trade creditors
  • Shareholders

Enterprise Act 2002 (“EA 2002”)

The EA 2002 saw the Crown (HMRC) give up their preferential status and become unsecured creditors.  The thinking behind this was to give parity between HMRC and trade creditors, and thus hopefully making restructuring of a business easier.

However the government did not want to give all of this benefit to secured creditors (principally the banks). The legislation therefore invented the “Prescribed Part” of money that would have been available to the secured creditor.  The law “ringfences” a fund that is used by the Administrator or Liquidator to pay a dividend to the unsecured creditors.  The Prescribed Part is calculated as;

50% of the first £10,000 available; and
20% thereafter up to a maximum of £600,000

The example attached illustrates the changes that have happened taking  into account the EA 2002.Example


Government Loans to Fund Redundancies

2013 March 25 by



Whilst throughout the recent recession there has been considerable publicity over the government’s Time to Pay schemes, few employers are aware of the assistance that is available where a company is forced to make redundancies in order to preserve the business and other employment.

Invariably a company in difficulties with declining sales needs to reduce its workforce; however in some cases it cannot afford the upfront cost to do so.  Provided all other options available have been explored then The Redundancy Payments Office (“RPO”) can assist by making a loan to the company, to enable the cost savings to be made and then will agree a repayment term that the company can afford.

  • How do I obtain the loan?

The process is relatively straightforward, with a one page questionnaire to complete and submit to the RPO, along with copies of recent accounts and financial projections to demonstrate that the company will be able to repay the loan over a future term.

  • I have made redundancies and paid the cost from my overdraft – can I now obtain a loan?

 No – the assistance is only available if you can demonstrate that there is no means of paying otherwise.  It is essential therefore that the application is made prior to redundancies are made and paid.

  • What do I need to demonstrate when making the application?

You need to convince the RPO that;

i)                    You do not have the funds or other resources to make the payment.

ii)                   By receiving the assistance it will save a significant number of jobs.

iii)                 The assistance will secure the solvency of the company for the foreseeable future; and

iv)                 You will be able to repay the loan within an agreed period.

  • How much will the RPO pay?

The RPO will cover the statutory redundancy payable under Part XI of the Employment Rights Act 1986.  The current weekly statutory limit is £450 per week.  There is a ready reckoner attached to assist you in the calculation. RPO ready reckoner

  • What is the timescale?

If the information provided is complete and presents a compelling case, it will be reviewed by the RPO and can take up to 4 weeks.  You should therefore allow 6 weeks between application/interview and a decision.  It would normally take KRECR 2-3 days to prepare your application.


How can KRECR help you?

We are experienced in assisting clients to obtain the available assistance and have found that applications are more likely to succeed if supported by a concise summary of the information required.  We can assist in producing profit and cashflow forecasts and are prepared to work on a contingency basis, ie if the application is rejected then no fee is payable.  We would expect our fees to be between 5% and 10% of the loan obtained.  Should you wish to make the application without assistance there is a national helpline of 0845 145 0004.

Members Voluntary Liquidation v Striking off

2013 March 8 by

Members Voluntary Liquidation V Striking off

We are often asked whether a solvent company that has ceased to trade should be wound up voluntarily by its members or an application be made to strike off.  Both options can provide an efficient means of dissolving a company and returning investment to its shareholders.  When deciding which route to take certain key matters need careful consideration.

Critically, before anything is done the taxation aspects must be carefully considered to ensure that full advantage is taken when timing events.

Members Voluntary Liquidation (“MVL”)

All MVL’s require a declaration from the majority of the directors stating that all creditors will be paid in full together with statutory interest within a period not exceeding twelve months of the winding up.  If the company fails to settle its liabilities within the prescribed time then any director making such a declaration without having reasonable grounds in forming that opinion is liable to imprisonment and/or a fine. It is critical therefore that directors take proper advice and give full consideration to the company’s position prior to making such a declaration.

As the services of a Licensed Insolvency Practitioner are required for a liquidation, for smaller companies, especially dormant ones, it may not always be the most cost efficient method of dissolution.  It does however have some important attributes to protect the directors once the Liquidator has distributed the assets. Some points worthy of note are listed below:

  • It is a very quick method to dissolve a company.  In certain circumstances the shareholders may receive a distribution immediately upon the commencement of liquidation.
  • The timing is under the shareholders control and therefore full advantage can be taken for tax planning purposes.  Consideration should be given by shareholders to the company making income distributions prior to liquidation to optimise the effect of tax allowances on the capital distributions made following liquidation.  Anti-avoidance provisions may need to be addressed.
  • The directors can generally relinquish responsibility for the company and any distributions and allow a Liquidator to deal with all the formalities to dissolution.
  • The basis of costs may be agreed prior to the commencement of the liquidation.
  • Distributions in specie to shareholders can be made, avoiding the need, and cost, of the liquidator selling all of the assets.  Typical examples may include motor cars and properties.
  • All of the reserves (including the share capital) can be distributed to the shareholders in contrast with a striking off where generally the share capital passes to the Crown as Bona Vacantia (“ownerless goods”), subject to the concessions described below.
  • Following certain formalities, once the liquidator distributes assets the distribution cannot be subsequently upset by a claimant.  Such claims may arise, for example, where an industrial injury claim is made some years after the company ceased trading or where the company had historically assigned a lease and at a future date the assignee defaults on the terms of the lease leading to a claim by the landlord.

Striking Off

Application for striking off is made to the Register of Companies under the provisions of the Companies Act 2006.  It can be a very cost effective method of dealing with dormant companies with no assets or liabilities (including contingent liabilities).  Points to note are listed below:

  • Ensure there is no further purpose of the company prior to dissolution (if only say to protect the name) as if the company needs to be resurrected following dissolution it could provide expensive.
  • Ensure that the company does not have any assets or liabilities whether actual or contingent.  On dissolution all remaining property or rights become bona vacantia with ownership passing to the Crown.
  • A company cannot normally make a distribution except out of profits available for distribution and therefore cannot distribute its share capital when it is struck off.  For companies with substantial share capital a formal liquidation may therefore need to be considered.  In 2006 the Treasury confirmed that in cases where a company had been struck off, and where the shareholders had taken advantage of extra-statutory concession C16 (effectively, for tax purposes, distribution of revenue reserves are treated as capital distributions), and where the distribution of share capital in question was less than £4,000 then, as a concession the Crown agreed to waive its rights to any funds distributed to the former members.
  • This extra statutory concession has recently been enacted into law and a limit of £25,000 has been imposed on the total amount that can be distributed as capital, rather than income, for tax purposes.
  • Taxation aspects must be agreed with H M Revenue & Customs.  Consideration should also be given to taper relief issues and also tax arising on the waiver of inter-company debts.


When considering the dissolution of a solvent company it is worthwhile seeking professional advice as to the best course of action.  This bulletin is not intended to be relied upon as a definitive statement of the law and professional advice should always be sought on any specific issues.

The professional costs can be substantially reduced if the directors or professional advisors deal with realising assets, paying creditors and agreeing the taxation aspects prior to a Liquidation.  By careful planning and liaison, it is possible to minimise the liquidation costs dramatically and achieve a tax efficient exit to a company which is of paramount importance to clients.

Tax Implications

Clients considering liquidation or strike off should take advice on the tax implications if doing so.  In normal circumstances a distribution of assets by a company to a shareholder is an income distribution for tax purposes, in the same way as a dividend, except to the extent that it represents a repayment of share capital.  However, a distribution to shareholders in a winding up is not a distribution for tax purposes, but is a capital receipt taken into account when calculating any chargeable gains or losses on the deemed disposal of the shares.

The same tax treatment applies where the company has made or intends to make, on application to be struck off, and makes a distribution in respect of share capital in anticipation of being dissolved, provided:

  • At the time of the distribution the company intends to secure, or has secured, the payment of any sums due to it;
  • At the time it intends to satisfy, or has satisfied, any debts or liabilities owned by it; and
  • The amount of the total distributions does not exceed £25,000.  This cap applies only to a distribution of profits.  A repayment of share capital will be a capital receipt in any event.

How can KRECR help?

If your client has dormant companies then we will review, free of charge, each one and recommend whether it should be subject to a Members Voluntary Liquidation or striking off.  Where we recommend strike off we will either undertake the process for a fixed fee of £500 or provide your client with the necessary forms and checklist so that they can undertake the procedure themselves.

Where we recommend Members Voluntary Liquidation we will provide a fixed fee quote to undertake the process with no obligation on the client.

What will KRECR not do?

We do not provide the client with tax advice; this is left to the clients advisers.  If appropriate we could recommend tax advisers to the client; however this is usually provided by the company’s own advisers.


2013 February 15 by


In simple terms, a CVA is a deal or compromise reached between a company which cannot pay its debts as they fall due and its creditors, typically for repayment of a percentage of a company’s debt over an extended period of time.

It is a formal procedure governed by the Insolvency Act 1986 and overseen by a Licensed Insolvency Practitioner.  However, whereas Liquidation has over 100 Sections in the Act, the CVA has only 7.

You will therefore appreciate that it is a very flexible procedure.  In essence it is for the company and its creditors to agree a deal that is acceptable to both side and creditors may well be tempted to agree to a CVA if they see that it offers a better return than Administration or Liquidation.

However, an early word of caution.  Without, some sort of “new ingredient” eg injection of funds, new management, change of product, new business model etc a business that has been loss making in the past is likely to be loss making in the future and a CVA might therefore be simply delaying the inevitable failure of the company.

But if there is a sound underlying business in place and a coherent explanation for past difficulties, then a CVA might form a viable alternative to Administration or Liquidation, preserving value for stakeholders in the company.

The procedure is perhaps particularly applicable to retail and licensed trade business where unprofitable outlets or pubs (which but for a CVA the company could not otherwise exit) are dragging an otherwise profitable business down.  We look at this in more detail later in this article.

The procedure is relatively straightforward.

  • The company with the assistance of a Licensed Insolvency Practitioner (the Nominee) prepares a proposal that outlines the reason for the current difficulties and the plans for the future.  It will also outline the projected return for creditors, typically so many pence in the £ over a period of time, often several years.
  • The proposal needs to be a detailed, well thought out document as this is what creditors will consider when deciding whether or not to support the CVA.  In this respect, cheapest is not always best. You get what you pay for. We appreciate that available funds for professional costs will be of course limited but a low Nominee’s fee tends to mean little assistance from the Nominee and this can be a false economy.
  • The Nominee will issue the completed proposal to creditors and convene a creditors meeting on a minimum of 14 days notice.  In this period, the company is not protected from creditor action although in certain circumstances, a moratorium can be obtained.
  •  At the creditors meeting, a majority of 75% or more in value of unsecured creditors who attend either in person or by proxy must vote in favour of the proposal.  If any connected votes are used in favour, then a second vote is held at which connected votes are excluded and a majority of 51% of unconnected unsecured creditors must be in favour.  This second vote is to avoid connected votes being issued to force through inappropriate proposals.
  • The position of HMRC is crucial.  They will often have a “blocking” vote ie over 25% and they need to be onside.  Compliance in the past, ie timely submission of returns can be as important to them as payment and as you have seen in the recent case of Rangers Football Club, if they feel that they have been prejudiced, they will not support any form of proposal.
  •  A shareholder meeting is then held to sanction the creditors decision and a majority of 51% of shareholders needs to be in favour.
  •  If the proposal is accepted, then the Nominee becomes the Supervisor and does what his title suggests; supervises (or monitors) the CVA.  He does not become actively involved in the day to day affairs or management of the company.
  •  A typical CVA will provide for payment of a regular set figure or percentage of profit  to be paid to the Supervisor over an extended period of time and these funds will be passed on to the creditors.
  • Once the company has complied with terms of the proposal (and this will rarely be repayment of creditors in full) the CVA ends and creditors write off any unpaid element of its debt.  The company is then free to trade as normal and stakeholders, in particular shareholders, retain value which would not have been the case had the company collapsed into Administration or Liquidation.

So far so good.  But we need to consider why CVA’s are relatively uncommon.

They are a formal insolvency procedure and whilst they are not advertised, notification has to be sent to the Register of Companies and this will be picked up by credit reference agencies.  So a company’s customers might well become aware of the CVA and could be nervous about placing business, especially any long term contracts, with a company which is clearly in financial distress.

Also, suppliers who are being asked to defer payment and perhaps write off an element of their debt, are often understandably reluctant to offer further credit, so cashflow might be a problem.

The company is also faced with the prospect of contributing its surplus income into the CVA for several years to come, so will have limited funds available for investment in the future of the business.

However, there are certain types of business which appear well suited to the CVA process and retail and the licensed trade are high on the list.

Consider a company which has, say, 6 outlets or pubs of which 4 are profitable and 2 are not.  The losses in the 2 unprofitable outlets are dragging the business down and it cannot afford to exit the leases on the 2 outlets in question.

If a CVA was prepared, the  unprofitable outlets could be closed and the exit costs eg unpaid rent (past and future), dilapidations, employee redundancies etc could be included as claims in the CVA (and compromised into an agreed figure eg 12 months rent) and paid over a period of time out on the profits made in the future from the 4 profitable outlets.

We have seen this procedure used on a number of high profile retailers recently eg JJB Sports (twice!), Blacks, Focus DIY, Barratts, Racing Green, but there is no reason why it cannot be used on smaller cases too. The key is to offer a reasonable return to creditors but also to engage with key creditors at an early stage.  We have found that if they feel they are part of the process early on, rather than treated as an afterthought, they are more likely to vote in favour of the proposal.

Finally, we should mention that much of what we have said above is equally applicable to Partnership Voluntary Arrangements (“PVA’s”) and Individual Voluntary Arrangements (“IVA”) for partnerships and sole traders respectively.



Gareth Roberts


2012 December 21 by



The Background

On 29 June 2012, the FSA published the findings of its review into the sale of interest rate hedging products to small and medium sized businesses.  By 23 July 2012 the FSA had reached agreement with Barclays, HSBC, Lloyds, RBS, Allied Irish, Bank of Ireland, Clydesdale, Yorkshire Bank, Cooperative Bank, Northern Bank and Santander (“the Banks”) to participate in the redress exercise to compensate customers who have been mis sold such products.

  • What is an interest rate hedging product?

The purpose of an interest rate hedging product is to enable the customer to manage fluctuations in interest rates.  The products are typically separate to the loan from the Bank, and include swops, caps, collars and structure collars.  In simple terms the agreement allows the customer to swop a fluctuating rate of interest for a fixed rate.  Swops products vary in their complexity and the FSA stated that when sold in the right circumstances, they can be of value to the customer.  However the FSA said that it had found a range of poor practices including;

  • Lack of clarity about the costs of stopping a product.
  • Failure to ensure that the customer understood the risk.
  • Selling products based upon personal rewards rather than customer needs.

The FSA recently increased its estimate of the number of interest rates swops sold to small businesses from 28,000 to 40,000. Estimates of the total costs expected to fall upon the Bank’s collectively are in excess of £1 billion.

  • What have the Banks agreed to do?

On 3 September 2012 the FSA announced that a number of the Bank’s had appointed their independent reviewers, approved by the FSA.  The independent reviewer will review all aspects of the redress exercise and ultimately determine whether redress will be appropriate. The Banks have agreed to prioritise cases where customers are in financial difficulty.  The Banks have also committed that, except in exceptional circumstances such as, for example, where this is necessary to preserve value in the customers business, they will not foreclose  on, or adversely vary existing lending facilities without giving prior notice to the customer, and obtaining their prior consent, until a final redress determination has been issued, and if relevant, redress provided to the customer  You should continue to meet your contractual obligations, however dialogue with your Bank in this period is crucial.

  • What is meant by sophisticated/non sophisticated customers?

In the view of the FSA, smaller businesses are unlikely to possess the specific expertise to understand all of the risks associated with these products.  The FSA have classified such customers as “non sophisticated”.  A customer would be classified as a “sophisticated” customer if at least two of the following were met, in the financial year during which the sale was made;

  • A turnover of more than £6.5 million
  • A balance sheet total of more than £3.26 million (gross assets)
  • More than 50 employees

The relevance is that only non sophisticated customers fall within the scope of the review. The review relates to products sold on or after 1 December 2001.

  • If I bought a swop or simple collar what should I do?

You will be contacted by your Bank to explain whether you are considered to be a non sophisticated customer.  If you are considered non sophisticated, then the Bank will ask you whether you want your sale to be reviewed. If you do want your sale reviewed then you will be asked to provide various information.  Following the review, the Bank will propose redress if appropriate which will be agreed by the independent reviewer.  If you decide to accept the redress proposal you will be issued with a final redress proposal.

  • I am experiencing financial difficulties – how long will this process take?

No timescales have been given other than the Banks must provide a response within 8 weeks.  It is likely that businesses in financial difficulty will be better able to negotiate with creditors and agree Time to Pay Agreements with HMRC on the strength of the likely redress.

  • How can KRE help my business?

KRE does not advise customers on how to administer their claims for redress against the Banks.  There are many organisations far more qualified to assist in this regard.  We are however involved in assisting businesses with finance difficulties as they continue to trade whilst going through the redress process.  Directors still face funding issues and we can help you negotiate with creditors such as HMRC to assist temporary cashflow.  Your relationship with your Bank needs to be maintained and we can assist in agreeing a short term strategy whilst a decision is awaited.

Finally, directors still have duties and responsibilities under the Insolvency Act 1986 and we will provide guidance and advice through this difficult period.



2012 December 14 by


Greg Mitchell QC, acting for HMRC, recently confirmed that his client had issued 25 winding up petitions against Football League Clubs in the past 2 years.  Current statistics show that since the commencement of the Premier League in 1992, 46 Football/Premier League Clubs have entered Administration (including repeat insolvencies). This, at a time when the English Premier League generates record annual revenues of around £2 billion and is the world’s most lucrative domestic competition.

Relationships between football and HMRC are at an all time low mainly due to policy makers in each organisation being diametrically opposed on fundamental issues when football clubs face insolvency.

The Football Creditor Rule

A football club’s right to compete in the Football League depends upon it holding a share in each of the Football League (“FL”) and the Football Association (“FA”).  The FL and FA therefore dictate the terms upon which any purchaser of a club can continue to operate as a football club.  In simple terms, the old club must exit from Administration by entering into a Company Voluntary Arrangement (“CVA”) with its creditors.  In addition, the terms of the CVA must be such that all creditors classified by the FL as “football creditors” must be paid in full.  If the above is not achieved then the club will not be able to continue its participation in the FL and FA (other than in exceptional circumstances which still remain undefined).  In practice, failure to comply will result in further points deductions and/or demotions.  An automatic 10 point penalty deduction (9 points in Premiership) is triggered on Administration in any event.

The FA and FL defend the football creditor rule on the basis of protection of the entire league and the need to avoid a domino effect on other clubs.  Premier League head Richard Scudamore defended the position rather bluntly  “we will defend it on the basis  of the chaos that will ensue if we don’t have it. We are a closed system, we trade on a close basis between each other”.  Clearly HMRC beg to differ on this view.

HMRC CVA position

HMRC have stated definitively that, where the CVA proposals for a football club contain provisions to pay football creditors in full, then they will use their vote to reject the proposals unless they too are paid in full which is highly unlikely to be the case.  As a reminder, a CVA proposal is rejected if 25% by value of votes reject, or if 50% by value of votes reject having excluded any connected votes such as inter company loans or directors loans. There will be clubs therefore that by simple virtue of the mathematics, will enter Administration with no feasible CVA exit.  The Club would then be at the mercy of the FA and FL regarding its future.

In order to understand how we have arrived at this impasse we need to look at recent events;

February 1992        
English Premier League formed in a break-away from the Football League.  BSky B and BT Group TV deal now worth £3 billion.

March 2002  
ITV Digital, sponsors of the FL enter Administration reneging on a £900 million sponsorship deal and causing financial difficulties to many FL Clubs.

October 2002      
Leicester City enter Administration

September 2003    
HMRC lose preferential status of claims in an insolvency by amendments to the Insolvency Act 1986.

May 2004      
Leicester City CVA approved with football creditors paid in full, Leicester go on to obtain promotion back to Premier League in 2004, culminating in FL and FA introducing the points deduction rules after complaints from other League Clubs.

December 2004     
Wrexham receive first 10 points deduction for going into Administration.

December 2004     
IRC V Wimbledon: HMRC challenge the football creditors rule in Wimbledon CVA. HMRC lose on ground that funds paying football creditors in full are third party funds which would not be available to HMRC in any event.

May 2008    
HMRC v Leeds Utd:  HMRC challenge outcome of CVA on grounds that  votes used to obtain the necessary majority were actually connected and therefore disallowed.  Case never gets to Court as Administrators fail the CVA.  Leeds deducted additional 15 points for failing to exit Administration via CVA.

August 2010   
HMRC V Portsmouth: HMRC challenge outcome of CVA, again challenging voting values, but lose on all accounts.

May 2012     
HMRC v Football League: HMRC challenge FL’s rights to withdraw membership on insolvency and the football creditors rule.  HMRC lose on both issues and do not appeal.

November 2012   
Rangers (In Administration) win in a tax tribunal against assessments of £43m by HMRC over its use of Employee Benefits Trust (“EBT’s”) to pay players between 2001 and 2010.

December 2012  
HMRC appeal against Rangers decision… to be continued.

The high profile casualties of Portsmouth, Crystal Palace, Southampton, Leeds United, Wimbledon, Ipswich Town, Derby County, Leicester City, Barnsley, Bradford City, QPR and Hull City all share the misfortune of relegation from the lucrative Premier League.  The football industry is fundamentally different from other industries in that, however carefully managed, a club is dependent upon results over 38 games in a season.  In 2008 none of the Newcastle United’s business plans envisaged relegation from the Premier League for the first time – only the wealth and support of owner Mike Ashley prevented Newcastle from joining the above statistics.  One has to ask therefore whether the fortunes of Leicester who avoided a points penalty really justify the spiral of punishment meted out to the likes of Portsmouth, Southampton, Leeds, Wimbledon and Bradford.

The football creditor rule was designed to protect member clubs from the fall out from the collapse of one of its members.  Its impact has now however;

  • Encouraged football clubs to take risks in buying players when in danger of relegation with the benefit of an insurance policy funded by TV monies due in the future; and
  • Placed many football clubs in danger of extinction by virtue of a zero tolerance stance from HMRC who can block its ability to remain in business.

It is not practical to withdraw the football creditor rule overnight as this would leave clubs exposed unfairly.  Most transfers are paid over a 4 year period and therefore it could be withdrawn over time, forcing clubs to sell players to clubs who can afford to pay for them regardless of relegation.  In the recent case of Crystal Palace when the Administrators sold their most valuable player, the FA dictated which other clubs were paid from the proceeds.  When another Championship club faced a winding up petition from HMRC their zero tolerance attitude resulted in several football clubs, which were due payments, agreeing to defer payment in favour of HMRC as if the Club had gone out of existence there was no guarantee that parachute payments would be forthcoming.  The football creditors therefore became subrogated behind HMRC.

There are no easy solutions. However until the football authorities and HMRC cease hostilities and seek to fund a workable solution, then it is only a matter of time before a  significant football club becomes extinct. This cannot be in the interests of the industry and will deprive HMRC of future income.


Paul Ellison is a partner in KRE Corporate Recovery LLP and in recent years has been involved in advising three football Championship clubs, all of who were sold and avoided any form of insolvency.