Exclusive – Polpo seeks CVA as it struggles with £550,000 unpaid VAT bill: Award-winning central London business Polpo, owned by Russell Norman and Richard Beatty, is to seek a company voluntary arrangement (CVA) and sell two loss-making central London sites as its faces a £500,000 tax bill and a deteriorating trading position, Propel can exclusively reveal. A proposal document sent to creditors by Elwell Watchhorn Saxton reports turnover was £13m with profits in excess of £1m in 2016. The report states: “To support the growth of the business, the directors employed an individual to take over the day-to-day management of the business in 2017. In addition, he appointed a senior management team to support him, including a finance director and operational management. The increase in head office costs, notably as a result of the additional personnel, was premised on the basis of an uplift in sales and site contribution. However, following these appointments in 2017 there was no substantive increase in sales in line with the increase in overheads. Consequently, from 2017 the following issues had an impact on the performance of the company. The absence on a day-to-day basis of the original management team, which had driven the business from inception and set the standards that led to the growth and branding of the business, led to a decline in operational standards and performance. This was reflected in declining customer satisfaction (evidenced by third-party reviews) and declining like-for-like sales. Despite the increase in head office costs, notably a full-time managing director, finance director and operational staff, the key management team were not as engaged in the day-to-day promotion and management of the business compared with the shareholders. This was reflected in the absence of promotions, new menus and staff management. This absence of management of sites led to a drift in performance leading to like-for-like sales declining and standards slipping. Although not as engaged in the day-to-day management of the business, the new management team focused on a number of initiatives they envisaged would improve sales and performance – notably via the employment of marketing agencies and investment in high-speed internet connectivity. This reflected a substantial increase in non-essential costs, which didn’t directly benefit the underlying trading business. Previously the business had been very cost-conscious, with minimal expenditure unless approved by the directors. This weakness in cost control led to a substantive increase in costs, which was reflected in head office costs doubling from 2015 to 2017 with fixed head office costs of circa £1.2m per annum. With like-for-like sales on a site basis declining and absolute overall sales declining as a result in the reduction of outlets from circa £13.7m in 2018 to a forecast of circa £10.3m in 2019, the increased overheads were unsustainable and the business made operating losses. Performance deteriorated substantially during summer 2018 as the historic underinvestment and weak management led to sales declining further. These ongoing losses led to the historic cash reserves of the company being diminished and ongoing trading being funded by deferring payments to key suppliers. The directors were not actively engaged in the business on a day-to-day basis and the management reporting to them was limited. The high-level management packs they received didn’t indicate to a full extent the deteriorating performance with the shareholders being reassured by the prior experience and reputation of the managing director and finance director to address the issues. Unfortunately, in addition to the issues caused as a result of the new management team’s strategy, the retail market in general has been hit by the well-publicised economic downturn, which in turn has had a negative impact on the foodservice industry, which relies on a strong retail market and footfall. The issues faced by the company have resulted in excessive spending. Consequently, the company doesn’t have the funds available to meet its £500,000 liability due to HMRC. The liability due to HMRC initially arose because of a VAT liability in relation to the sale of Ape & Bird, a pub the company previously invested in and managed under the Polpo brand. It was envisaged the proceeds would be used to reduce the bank’s debt. However, due to the deterioration in the company’s performance its bank utilised all the sale proceeds (including the VAT due on the sale) to reduce the company’s bank debt. While the proceeds reduced the debt to circa £250,000, thereby minimising the bank’s exposure to the company, it created a significant issue for the company as it had assumed aspects of the sale proceeds would be made available to support trading and meet the corresponding VAT liability associated with the sale. Due to the deterioration in trading and the absence of the cash injection from the sale of Ape & Bird, the company was unable to pay HMRC to terms, notably in respect of its VAT liabilities. As a consequence of the HMRC arrears, in July 2018 the senior management negotiated a payment plan with HMRC in which outstanding arrears would be repaid by late 2018. However, by September 2018 the deteriorating performance, illustrated by declining like-for-like sales and excessive cost base ensured the company was incurring significant losses reflected in significant cash flow issues, notably due to the inability to pay creditors to terms. Consequently, it was not possible to maintain the sums due to HMRC pursuant to the payment plan and the sums due in September 2018 and the time to pay agreement was breached. It is HMRC’s policy that it won’t renegotiate terms of an agreed payment plan and, as the company was unable to meet the payments due, HMRC demanded the outstanding sum of £550,000 (including surcharges of circa £26,000) be paid immediately. The directors received notice dated 19 December 2018 from HMRC that unless the sum of £550,000 was paid to HMRC in seven days, HMRC intended to commence winding-up proceedings and we understand HMRC’s solicitors are currently drafting the winding-up petition. In late October 2018, prior to the departure of the senior management, a report was produced by senior management to the directors that showed the full extent of the issues the company faced. The report highlighted the deterioration in like-for-like trading by site, significant overhead costs, creditor arrears and the breach of the HMRC time to pay agreement. In response to this report and the meeting with the shareholders, the managing director and finance director exited the business. As a result of their exit, the directors took back control of the company in October 2018 and have re-engaged with Ratnesh Bagdai, from RNB, to take on the role of financial director. Bagdai had been the company’s financial advisor prior to the appointment of the finance director. He has a reputation as a sound financial manager in the restaurant sector, with a long tenure as financial controller of Caprice Holdings and has continuing involvement at director level in the Brindisa Group. In addition, those employees who oversaw the management of the business through the successful eight years of its growth have been reconstituted. Significantly, the re-engagement of the directors ensured there was active day-to-day management of the business. The directors believe this has led to improved staff morale and is partially reflected by a general improvement in customer reviews and performance, notably in December. Since Richard Beatty took over as managing director on 29 October 2018, the following changes have been implemented – cumulative head office salary savings made since October 2018 to date now total £577,000 per annum, notably via the exit of the managing director (circa £180,000), finance director (circa £130,000) and other operational staff. Head office numbers reducing by five; other head office costs have been reduced by a total of £440,000 per annum to date, notably cancelling marketing contracts, reducing travel and benefit costs, cancelling non-core contracts, notably in respect of IT equipment, and online advertising. In addition, all key expenses need to be approved by Beatty, which has led to non-core spending not being approved. Directors have reduced drawings from the company to subsistence levels creating a further saving of £200,000 per annum. Total savings to date therefore exceed £1m. Polpo is fundamentally a people business. The prior senior management team spent little time engaging with staff and the customers, which led to a deterioration in service standards. The re-engagement of the high-profile founders has re-engaged the company’s historic customer base and has led to an improvement in staff morale. This was evidenced in the improved performance in December and robust sales during this period. The company is looking to exit two of its central London restaurant sites. Management anticipate premiums will be paid to the company on the exit of the leases. It is anticipated this will further support the company’s cash flows going forward. Both sites are loss-making, hence the exit from these sites will ensure losses are reduced by circa £200,000.” Creditors and shareholders are set to vote on the CVA proposal on Friday, 8 March.