Our mantra has always been that the sooner we are brought in, the more we are likely to be able to do to help a company facing financial difficulties. Our first aim is to see if we can rescue a company, whether through turnaround advice or via an insolvency procedure such as Administration or a Company Voluntary Arrangement. In this case study from one of our own instructions, one of our partners, Nitin Joshi, looks at what caused a seemingly successful company to end up facing such severe financial difficulties that a Creditors Voluntary Liquidation (CVL) was the only option. In a cautionary tale, he notes that the initial drive and enthusiasm of the early days of a business can quickly wane when directors fall out.
Background to this case – The red flags
This company was set up in 2015 and operated by the two founding directors in their mid-20s with a knack for creating and offering vibrant digital content and solutions to advertisers. The company grew its platform delivering photographic and mobile technology to fast moving markets.
Growth was rapid and the company garnered support from international brands, allowing it to grow quickly and to punch above its weight. To meet demand, it took on graphic art and creative experts, at one stage employing 20 full time staff, supplemented by freelance contractors.
Past performance is no guarantee for the future, however. Turnover was healthy, hitting £3.5m in its best year, but collapsing down to just over a £1m in its last year of trading. But as we all know, revenue is just one half of the picture.
A little like rock bands, the unrelenting pressure to deliver premium products took its toll on the founding directors. Soon, communication between the two became sporadic and strained. The one thing that should rise above personal friction, certainly at director level, is the quality of the communication between the directors. In this case, as communication waned, the company and its smooth operation suffered. Neither took interest in the state of the company’s cash flow. These were the red flags.
By the time we were called in, the position was serious.
By the time of the initial meeting with us, in late 2020, the damage had already been done and what was now in front could not be overlooked: £300k was owed creditors including £90k to HMRC. Cash in the bank was limited and debtors of £270,000 at varying stages of ageing were not being chased because for these dissenting directors, they didn’t want to upset client relationships by asking for unpaid invoices to be settled in accordance with credit terms. Some of these clients were based abroad.
Also, there were legacy issues arising out of Covid. Lockdown saw a postponement or cancellation of projects. Like many companies during this period, the company failed to adjust its cloth to reflect this new reality. In this case, matters were exacerbated by the failed relationship between the directors.
In the end a Creditors Voluntary Liquidation was inevitable. Having been appointed Liquidator, our task was to salvage something: debts were recovered using a third-party agency who were particularly good at navigating the complexities of the paper chase with clients across Europe who had labyrinthine bought ledger departments. Patience and persistence played their part, however. In the end, recovery of debts was better than expected.
Also, there was a meaningful amount of work in progress, with each of the directors agreeing that some consideration was payable for migrating company clients to their respective lifeboat companies. This produced an unexpected realisation for the benefit of creditors.
In the end, a brilliant result for creditors as achieved, with a dividend of over 74p in the £. The company was dissolved earlier this year – 2024.
The takeaways from this Creditors Voluntary Liquidation
The takeaways for this liquidation are:
- It’s not a certainty that a business will trade into the horizon with happy directors. Whilst there’s great enthusiasm in the early days, the fire of entrepreneurship and camaraderie can fade in time.
- Revenue as we all know is vanity, credit control is just as important.
- Whilst brands can boost morale and can be powerful marketing tools, there is no point in delivering a product consistently at a loss. In this case, some of the projects never made any profit but of course taking the hit can be strategically viable if there is a bigger picture.
Above all, although the scale of this company’s problems were too big for it to be rescued, much can be achieved for creditors if a holistic approach to salvage is adopted.
Interested in this Liquidation Case Study? Want to find out more?
If your business is facing insolvency, the sooner you contact us, the more we can help.
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If your business is facing financial difficulties, the best advice is always to seek professional advice early.
As our insolvency and restructuring guide shows, the road from financial distress to crisis can be quick and brutal. However, there might still be an opportunity to restructure the business and turn it around if professional advice and help is sought quickly.
However, once the crisis point is reached (exacerbated in this case by the poor relationship between the two directors), often characterised by a lack of liquidity, which makes it impossible to pay HMRC, and suppliers, meet overheads, pay staff, or simply finance the running of the business, then that is when a formal insolvency procedure is required.
