Executive Summary:

This complex case study examines the successful turnaround and restructuring  of a group of  mid-sized professional accountancy firms (referred as “ASPL” for this study)  based in London.

Background

ASPL had been a well-respected firm in London, providing a range of accountancy services to both corporate and individual clients. Despite its strong reputation, the firm began experiencing declining revenues and increasing debt levels due to a combination of market competition, outdated business practices, and an inefficient operational model.

The firm, established in the late 1980s, was acquired by a  “buy and build”  acquiror in late 2018 (Groupco). This acquiring company also purchased 6 other accountancy firms and the plan was to build accounting fee income to £20m pa and to add other professional services  – whilst centralising overheads. The buy and build strategy was driven by the acquirors own capital and with £2m of funding provided by Clydesdale Bank under a secured overdraft facility.

Now as one of the groupco’s subsidiary firms, APSL faced significant financial and operational challenges in 2019 and the owners approached KSA for advice on how to deal with the issues it faced. Principally it had racked up trading losses which led to a sharp increase in HMRC liabilities and staff morale was poor given the growing uncertainty on whether it would survive or not. A time to pay (TTP) plan was put to the HMRC debt management unit by KSA and this was approved over 2 year repayment period by HMRC debt management.

Unfortunately, the directors did not drive the necessary structural changes and so the TTP did not go to plan and the firm continued to lose money. KSA advised upon and helped build a CVA – company voluntary arrangement LINK proposal to restructure the debts and to remove around 18 roles, the costs of redundancy were likely to be a serious problem for cashflow but were necessary for survival. Using the CVA approach The Redundancy Payments Service met the leavers redundancy and lieu of notice claims.

This CVA was approved by HMRC and other creditors in late 2019. Following the introduction of a new management team, the  Groupco, overall had returned to profitability which enabled it to service APSL’s secured bank debt and future liabilities as they arose.  However, the Group in general, and the LLP in particular, could not generate sufficient income to pay its historic liabilities and therefore the designated members believed the only way forward for APSL was to reach an agreement with its creditors through a company voluntary arrangement.

As part of the CVA and following the restructuring and re-organisation since October 2019, the ASPL designated members were now confident it could trade profitably going forwards. Therefore, to protect its staff and also the future liabilities to HMRC, the business was hived up to another group company and a transfer of all staff was agreed to this entity.  This was part of a wider group restructuring and organisational review, undertaken by the Groupco’s management team, advised by KSA’s turnaround experts.  APSL’s CVA was completed successfully in 2023.

With regards to the hived up company: obviously all went well until Covid lockdowns, after which the group had built up losses and this hived up company, which  we shall call “APSL2” still had to service the secured overdraft debt of £1.78m owed to the company’s bank. This was the original company used to buy the 6 other practices and it sat under Groupco in the convoluted business structure. Given the poor performance the bank wanted to accelerate the loan repayments.

This was unaffordable and the company that owed the overdraft to the bank (APSL2) also asked us for help. In 2021 KSA negotiated a conversion of the overdraft into a long term loan with affordable repayments, outside of ANY formal insolvency process such as pre pack administration or CVA. The bank agreed to this and over time the secured debt was reduced from £1.78m to a shade under £1.1m.

Given the Clydesdale debt was “only” in APSL2 which was a small trading company and not secured at overall group level, Clydesdale Bank would have seen only 5-10p in the £1 recovery had the company gone into administration LINK or liquidation LINK. Groupco security had earlier been given to Archover for the overall group debts.

In 2023 the pressure became to great on the APSL2 company with the £1.1m loan from Clydesdale to service and HMRC began to threaten a winding up petition for some £200,000 of PAYE and VAT debts. Additionally the London landlord started forfeiture proceedings for the office occupied by APSL2, which had 9 months of arrears of rent. All the pressure caused problems in the groupco as management were diverted.

It was decided that the APSL2 company was no longer viable and the board appointed KSA’s insolvency practitioners, Eric Walls and Wayne Harrison to act as proposed administrators.

A pre pack administration marketing process was undertaken by Lambert Smith and Hampton and after 4 weeks and having had interest from 20+ potential buyers, a sale of the business to the groupco was agreed by the Pre Pack Pool and an evaluator. KSA insolvency practitioners were appointed to complete the sale. 38 jobs were saved and these employees now work for the overall groupco company.

So, a tale of over indebtedness, poor early management and Covid, with three companies wrapped into one case study. The groupco is now trading well, the recovery for the bank and HMRC was very small unfortunately after the pre pack administration, but KSA helped protect over 250 jobs across the group using various techniques –  TTPs with HMRC, solvent debt restructuring for the secured debts, company voluntary arrangement and a pre pack administration – all over a period of 4 years advising our Groupco and subsidiary company clients.

What if Your Practice Needs Restructuring?

If you are involved with a  complex group of professional practices such as accountants, law firms, IFAs and other regulated business, and YOUR debt pressures are building, please talk to Keith Steven, Gary Weber or Derek Robinson today. 0800 9700539

The case study above highlights KSA Group’s flexible approach to turnaround and restructuring. And we believe it demonstrates that we will look to solve business debt problems using a consensual work-out approach, BEFORE using formal insolvency techniques whenever possible. If necessary we can move to formal restructuring processes like CVA or pre pack administration as licensed insolvency practitioners too.