The husband of the director of a restaurant approached JT Maxwell Limited, for advice about the Company’s financial position.
The Company employed around 11 members of staff and was initially profitable. Over the past three years, profit had gradually declined, which was partially due to increasing overheads such as wages, pension, utility costs and food prices.
Turnover reduced further due to two new restaurants opening in the area, increasing competition. To cope, the director took out further borrowings which included personal guarantees in an attempt to keep the company trading.
Personal guarantees mean a director is personally liable if a company fails to repay its debt – it’s a common requirement for business loans.
The directors completed a cost-cutting exercise but were still left unable to afford to pay their debts. This led to the company falling behind with payments to HMRC. After some negotiations, they entered into a time to pay arrangement with HMRC at a level of £1,500 per week. The company failed to meet these repayments and at this point they reached out to us.
It was apparent that the Company was insolvent in that its liabilities exceeded its assets, and the Company could not pay its debts as they fell due. It was agreed, and the Director formally instructed JT Maxwell Limited to assist the Company, to enter into a Creditors’ Voluntary Liquidation.
Prior to the liquidation the director and her husband had relied on personal credit to cover their day to day household expenditure as they weren’t able to take enough salary from their declining business.
Upon liquidation, numerous personal guarantees crystallised and the director and her husband found themselves unable to maintain the repayments on the new increased level of personal debt. It was at this point that they both believed they were going to lose their home due to not being able to afford the repayments on their debt and mortgage.
However, following our advice, the director’s husband started a new business, keeping their original staff, using a new business plan with lower costs and higher profit margins.
The increase in disposable income within the household enable us to advise the director in regards to an Individual Voluntary Arrangement (IVA). If approved by creditors, this was the best opportunity to protect their new business and their family home whilst making affordable payments to their creditors.
We worked out the total debt was approximately £228,000 and we formulated a proposal based on income payments over five years, resulting in a payment of 38p in the pound to all unsecured creditors – i.e. they would each receive approximately 38% of their outstanding debt.
This proposal was based on income payments of approximately £1,200 per month which was a significant reduction in their contractual payments at the time, of approximately £3,500. This proposal was initially rejected by a major creditor that held 22% of the total debt.
However, as we believed that this was the best outcome for creditors as well as for our client, we decided to get a better understanding of the reasons for the major creditor rejecting the proposal. After a lengthy negotiation period with the major creditors, the rejection was overturned, and the IVA was approved.
The approval of the IVA meant that the new business was able to continue trading, providing the family with an income, saving staff jobs and protecting their family home.
The Lessons Learned
Avoid personal debt in business
This couple, like so many small business owners, felt a personal responsibility to their staff – a responsibility that led them into personal debt and threatened their own home and livelihoods.
This case study demonstrates the effectiveness of restructuring – even with spiraling debt and insolvency thrown into the mix, a restructuring exercise allowed this business to stay open and all of its staff to remain employed.
Seek help before things spiral
It’s often really hard to see the woods for the trees when you’re in a situation like this – you’re so busy keeping the business going and fighting fires as they spring up, that you don’t even feel like you have the time to lift your head to ask for help, and you wouldn’t even know where to start if you did! But this is exactly the time you need help the most – in fact, if you can reach out to someone like JT Maxwell before it gets to this stage, we’ll be even more likely to help, and probably at a far lower overall cost.
Advice is free
We remain passionate advocates for transparency in the industry, and we want to make sure as many people as possible know their options when it comes to insolvency issues. So, if you need a bit of friendly advice, just give us a call, we’ll be happy to chat and hopefully help.
If you, your client or someone you know is struggling with business debt and could use some friendly guidance, give us a call on 0800 0465 029.
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