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Thursday, 6 November 2008

We are delighted to bring your more information on a recent case for KSA.

We assisted a south east based Law firm to file a company voluntary arrangement (CVA). [ ] We believe that this is the UK’s first CVA for a Limited Liability Partnership or LLP. If you know otherwise please email me.

Case Study for a LLP
After a sharp downturn in business from collapsing property sales and conveyancing, the designated members (equivalent of directors in a limited company) were facing a crisis.
HMRC had been pursuing arrears of PAYE and VAT for some months and the Bank,which was Barclays in this case, had asked the well known insolvency firm,BDO Stoy Hayward [ ], to look at the options.

They concluded that there was a strongly viable business but that a cash crisis was imminent. This firm looked at the options of administration [ ]led restructuring, CVA, [ ] trade sale and so forth for the bank and members.

Independently the designated members took advice from KSA. I believed that we could avoid administration and the serious repercussions it would bring. I was not aware but soon learned that the Solicitors Regulation Authority has the power to remove clients files and trust accounts upon granting of an administration order.

Regulation 8.2 of the Solicitors Recognised Bodies Regulations 2007, recognition of the solicitors will automatically expire if a winding-up order or administration order is granted under Part II of the Insolvency Act 1986, or a resolution is passed for voluntary winding-up, or an administrative receiver is appointed, in respect of a recognised body.

What does that mean in plain English?Well simply the firm would lose all of its clients because the Solicitors Regulation Authority would remove the legal work and clients from the company to protect their interests, upon the granting of an administration order. In lay terms a SRA hit squad would arrive and remove all of the files and take control of the trust accounts etc.

Thus the business would cease to exist as a trading entity. Even more pertinent the SRA ranks ahead of the bank’s security!!

Even with personal guarantees from designated members, an administration would have resulted in a serious shortfall for the bank and obviously the trade and tax creditors.

Whilst the various parties were conferring as to the path to follow, HMRC issued a winding up petition [ ] with an accelerated hearing date. This gave the business only 4 weeks to propose a deal and get it accepted. We were appointed to construct the CVA deal by the designated members with the knowledge of the bank and the bank’s advisors.

I headed up the deal structuring supported by my colleague Marie Moody who dealt with the creditors issues and built the statement of affairs. We brought in one of our expert forecasters and he and I worked with the members to build a workable plan.

KSA persuaded HMRC not to advertise the winding up petition, to which they agreed providing a draft CVA was made available within 2 weeks.

The business reduced headcount and closed non performing units. Finally, a workable CVA was agreed with Barclays and filed in District Registry. HMRC agreed to stay the petition hearing until after the CVA was approved. Given it was the largest unsecured creditor, HMRC’s positive vote for the proposal led to that approval.

Its public knowledge that the enormous impact of the Credit Crunch has led to many failed estate agents, law firms and the like, this LLP is still trading today with the protection of a CVA [ ].

Three things contributed to the success of this job:

1. The good quality information and accounting information produced by the client. We were able to collect all the data we needed within a few days of commencement. This is unusual. It’s essential to have a good management information system.

2. The support of the bank and BDO Stoy Hayward who were very keen to preserve the value of the business and work quickly towards a workable deal.

3. HMRC – the Voluntary Arrangement Service [ ] was not involved with the initial winding up petition, however with their advice and involvement we were able to stop the petition advertisement and allow a short breathing space to get the CVA built.

Summary, LLP’s can propose a company voluntary arrangement that binds the unsecured creditors if approved. There is no liability for the designated members of the LLP, so they need not propose individual voluntary arrangements [ ], as would be the case in PVA or partnership voluntary arrangement.
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So the very powerful CVA technique can be a useful restructuring tool for law firms which are trading as LLP’s and whilst the Solicitors Regulation Authority will keep close watch they won’t step in to remove the risk for clients and trust accounts.

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