Cash Flow Problems

Cash Flow Problems and Creditor Pressure lead to Liquidation

Testimonial: When Business Recovery is not possible and Liquidation is the only answer. 

Sometimes a business faces insurmountable cash flow problems (and other related problems). In such cases, business recovery is not possible, despite the best efforts of all concerned. In this instance, a family run business had run into considerable difficulties, which they had not been able to overcome. The directors had put their heart and soul into the business. However, stress was mounting as cash flow problems, HMRC arrears and creditor pressure grew. We were called in to help and Liquidation was agreed as the only option. Under these circumstances, our role is to take the strain and manage as orderly a liquidation as possible.

The Client had this to say about our help and advice

The business was a retail outlet based in Warwickshire, and one of the directors said this about our work:

“Poppleton & Appleby’s (the insolvency arm of Business Recovery Specialists) help and advice was invaluable at a very difficult and stressful time for our family business. They provided us with friendly and non-judgemental advice from start to finish. They took control of the liquidation process for our company, which we were feeling extremely overwhelmed by. It was a huge weight off our shoulders and with the help of Poppleton and Appleby, the mountains of letters and phone calls we had been inundated with stopped almost immediately.”

This case study goes on to tell the story behind the difficulties faced and why liquidation became inevitable.

The set up of the business – Initial success

The company was set up in April 2013 selling a mixture of goods. These were made by the directors and also supplied by other traders. These traders would rent their own space in the shop, under licence. They paid a rental fee and a commission on their sales.

A suitable shop was found and the Directors signed a six year lease. They believed that after six years the contract was unlikely to be renewed. This was due to the landlord’s plan to develop the premises into student apartments. There was also a six month break clause in the lease, which seemed sensible for a new business.

All of the Company’s rental spaces had been filled before opening, and footfall was strong from day 1. The Company won a number of awards and the Directors were optimistic about the future.

A few months in, cash flow problems started

About four months after the shop opened, the directors realised that the costs of running the Company had become much higher than anticipated. With determination, however, changes were implemented to increase revenue streams. These changes were successful, but then the landlord made a decision which was difficult for the business.

The Landlord Decides He Wants to Convert the Premises to Student Apartments Sooner than Expected.

This came as a huge blow. The landlord said the company needed to look for somewhere else to trade. As a result, in total panic, the Directors stopped re-renting spaces to new traders when old traders had left. This had a huge impact on revenue. When added to the higher running costs, this meant that cash flow problems started.

One of the first consequences of this was that the Company fell behind with its rent. As a result, they arranged an informal payment plan with their Landlord so that they could catch up.

Efforts Were Made to Increase Revenue

The Company started to get on top of the rental arrears, by increasing the rental that was charged on trading spaces and by increasing the commission taken on the sale of traders’ goods by a small amount. However, the prospect of moving premises, and all the costs associated with it was not a positive one.

HMRC Then Assessed the Company for Unpaid VAT

A VAT inspection by HMRC then followed, the Company was assessed for wrongly reclaiming VAT from the rental invoices. As a result, despite the inspectors agreeing that the invoices were confusing and understanding where the error had come from, HMRC stated that they were owed c.£20,000 in unpaid VAT. HMRC also stated that VAT was owed on every sale that went through the shop’s till. The Company could have put in an appeal, that they acted as an ‘agent’ for its traders, who therefore paid their own VAT direct to HMRC, but being under so much pressure, the Company felt overwhelmed and did not appeal HMRC’s decision.

Both of the directors had other companies whose VAT records had been checked by HMRC on the same inspection, and it was clear that those companies each traded within the Company, paid rent to the Company, received sales monies from the Company and then had been paying VAT to HMRC on their own sales within the shop. However, HMRC still insisted that the Company owed VAT on every sale within the outlet on behalf of its traders and their sales.

In summary, the outlook was bleak when we were called in. There were significant cash flow problems, creditor pressure and HMRC arrears.

Liquidation was the only option

It was clear that the cash flow problems and other problems facing the business were impossible to overcome. In addition, we had to inform the Directors that they could not pay any more creditors’ bills with the business’s remaining cash. These would be seen as preference payments.

The following action was taken:

  • The Company notified its staff members (three of whom were self-employed) and traders of the impending closure,
  • Direct debits and all other payments were cancelled,
  • The small amount of stock held (cards, a small selection of gifts and wrapping paper) was reduced to less than cost price,
  • The closure of the shop in the least distressing way possible for the 130+ staff, traders and customers who had become so emotionally invested in the Company.

The Directors paid the traders the last of their sales money (this money had always been held in trust and was not the Company’s money to hold back) and paid the staff their final wage.

Once the Company had closed and the rental deposit was released to the Landlord via his solicitor, the Company was left owing its final month’s bills, along with the large debts to HMRC and to its Landlord.  With no funds remaining, the Directors and Shareholders decided to try and raise enough to pay for voluntary liquidation of the Company so that they could draw a line under everything.

At a subsequent Directors’ meeting, the Directors concluded that there was no alternative other than to place the Company into Liquidation.

If Business Recovery is not Possible, We Can Help

This case study shows how a business that was carefully planned, and initially successful, can end up with terminal problems. Often through no fault of their own.

As Business Recovery Specialists, our aim is always to help a business overcome its problems so that it can resume profitable trading. When that is not possible, our job is to manage the insolvency process towards liquidation as efficiently and sensitively as possible. Contact us or on 0333 222 8065 for a free initial chat.