Tuesday, 26 November 2013

Should a company that owes the taxman be awarded government contracts?

Interesting article in yesterday’s Daily Record:
http://www.dailyrecord.co.uk/news/scottish-news/gp-firm-win-two-huge-2845175

Interesting question, why should a company that owes the taxman thousands of pounds in unpaid taxes be awarded a government funded contract?

On the face of it, one might readily conclude that this should not be allowed to happen.

That said, in drawing such a conclusion is to ignore a number of important factors.

Firstly, being defined as insolvent does not necessarily mean the company cannot satisfactorily fulfil its duties or obligations in a contract.
In this case the use of the company voluntary arrangement (CVA) process allowed the insolvent company to legally and morally write off its unsecured debts, in exchange of a promise to pay money back its creditors over time from future profits.

In essence, the debts are written off when the creditors agree to the CVA - this usually results  in a solvent balance sheet and  it can pay creditors on time. It has a much stronger position than before the CVA.

In this case, the directors were faced with such a duty to maximise creditors interests; liquidation was an option, as this would have certainly avoided the position of their creditors getting any worse. But the recovery for creditors would have been very small indeed. One of the other alternatives, as they ultimately chose, though was to propose a CVA.

Why?  Because in this instance doing so meant the position of creditors would be considerably improved by trading on and paying them a sum, albeit over time, that was vastly more than they would have received in liquidation.

‘How could the CVA work?  Well because the company had an underlying viability that showed it could trade its way out of the situation, whilst paying creditors more, this showed it was a far better solution than liquidation.’

So back to the original question. Why should a company then be awarded a government contract? Well why not? The company obviously managed to demonstrate to their prospective customer that they could deliver the service and provide value for money. That has to be the acid test; surely, can they ordinarily deliver? 

Having had a CVA and legal protection from the unsecured creditors, means the directors can move the company forward and focus on restructuring, making sure the root causes of the difficulties have and continue to be dealt with.

No director would wish their company into such a difficult position, but once there, what can they do? They must look after the interests of the company’s  creditors. If it is a viable company, the CVA is what they SHOULD do, not knock the company down and start again with no debts.
As far as government agencies awarding contracts to companies in a CVA, I say, why not, providing the directors have provided full disclosure and, of course, demonstrate their company’s ability to deliver.

I have been involved in a case where a similar position existed. The company involved had successfully entered a CVA, with HMRC as an unsecured creditor bound by the terms of the CVA. 

The company tendered for a contract to provide services to none other than Audit Scotland, the public spending watchdog in Scotland. The company provided a full disclosure regarding the CVA along with their pre-qualification questionnaire and later their tender application. They won a 3 year contract against considerable national competition. 

Audit Scotland took the view that the company’s proposal was the best for them and accepted that the CVA was not a reason to doubt the company’s ability to deliver.
In short, there is precedent for government agencies to awarding contracts to company’s in CVA. Being in a CVA means the company has strength and support of its stakeholders and the business actually NEEDS to trade to pay back creditors and hopefully retain profits. 

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