7th July 2020
Insolvency Practitioner Michelle Elliot discusses key steps that business owners need to take to help navigate through uncertain times
Furlough, CBILS, BBLS, rates relief, VAT deferral, support grants. All of these measures have been made available to businesses since the pandemic began, but are these the solutions or merely kicking the can further down the road?
The Bank of England warned in May that the UK economy was heading towards the sharpest recession in history and whilst the bailouts have been welcomed, everyone is predicting a considerable rise in insolvencies. But will it be as severe as the pessimists predict?
The number of insolvencies has been less than expected since the pandemic hit as companies take advantage of the funding options available and the inability of creditors to take enforcement action against businesses, but uncertain times lie ahead.
There may be a second spike in Covid-19 cases, the furlough scheme is being phased out, deferred VAT will still need to be paid early next year and the loans that some have described as “free money” will need to be repaid and will be policed. The rushed-in support schemes have been plagued with stories of abuse with directors using loan funds for personal purposes.
An increase in insolvencies is inevitable, but for the vast majority of businesses who have used the remedies correctly, there is further support available from the Corporate Insolvency and Governance Act 2020 (the Act). The Act received Royal assent on 25th June and formally came into force on 26th June 2020.
The permanent reforms aim to give a company breathing space to consider its options, but the goal has to be that the moratorium will result in a rescue of the company as a going concern. So it is not to be ‘sold’ as a gateway to any formal insolvency procedure. Companies will get an initial 20 day ‘grace period’ to formulate a rescue plan, which can be extended by the directors for another 20 days. After that creditors can consent to a further extension of up to a year. Any extensions beyond that require an application to court.
There is also a new restructuring plan, which is a cross between a scheme of arrangement and US Chapter 11 bankruptcy, which will bind both unsecured and secured creditors. It will require 75% of creditors to agree and ultimate court approval to the terms of the proposed scheme.
The Act imposes restrictions that seek to prevent winding up petitions being presented to Court on or after 27th April 2020 where they rely on a preceding statutory demand served during the “relevant period”. The “relevant period” is from 1st March 2020 until 30th September 2020.
Creditors cannot present a winding-up petition where Covid-19 has had a material effect on the defendant and, though the courts will still process non-Covid related petitions, in reality any business is going to plead this as a defence.
In addition, and as result of thousands of businesses failing the cash flow test of solvency (the inability to pay your debts as they fall due) the Act has also suspended wrongful trading culpability for directors between 1st March 2020 and 30th September 2020.
This does not exclude directors from other breaches of duty including preferences, misfeasance and fraudulent trading.
So what steps should directors and business owners take:
- Work with your accountant to ensure accurate MI and forecasts to ensure visibility over your business for you and key stakeholders
- Take appropriate advice on any potential director duty breaches, specifically concerning any Covid-related business support funds
- Consider alternative forms of finance if further funds are required to bolster the business.
- Negotiate with landlords where reduced space might now be required and other cost savings resulting from new flexible working arrangements
- Obtain help with arranging repayment plans with HMRC and key suppliers
- Early engagement with a corporate recovery specialist to maximise the restructuring options available to the business
Many experts have predicted a tsunami of insolvencies in the short to medium term but with proper planning, advice and early intervention many businesses will survive and some of those that do will be with the assistance of the fresh measures available through the new Act.