With the ongoing impact of COVID-19 upon most businesses at this time, and with no clear indication of what further measures and consequent trade restrictions that may yet be imposed in already difficult trading circumstance,  business directors are being forced to consider whether they should be considering a form of formal creditor process.

Running a business has always been a challenge, but the global pandemic has been one of the toughest that company directors have encountered. Directors face some important challenges that they will need to recognise as such and make the right decisions in response.

Barrons are not insolvency practitioners but we think we should help you to consider decisions that you might be forced to take.

 

  1. What Am I Looking For?
  • Just simply signs of financial stress that might include
    • lower turnover, declining margins, and diminishing cash availability within the business itself;
    • circumstances that might be arising outside of your control in the general / industry market place in which you trade,
    • Essentially, anything that might lead you to conclude that in the foreseeable future the business may not be able to continue to trade
  • Of course most of the traditional signs that a business may be in trouble have been triggered in most businesses through COVID, what needs to be evaluated is
    • Have I read the signs and prepared accordingly and do I believe that the company will be able to survive in the short term (90-180 days recommended review period in line with Government announcements).
    • If you remain concerned by your findings from the short term review, then the company’s survival may be at stake and you should consider whether further steps are necessary at this time.

 

  1. Surely Government Has Introduced Help?
  • The Government has sought to try to sustain business through a raft of business loans, grants and schemes designed to maximise the retention of cash in the business and employment levels – sadly that will not always be sufficient and Government has sought to address such scenarios through The Corporate Insolvency and Governance Act 2020 (“The Act”)..
  • The Act included landmark measures to improve the ability of companies to be efficiently restructured
    • Permanent measures included three core aspects – a new restructuring plan procedure, a stand-alone moratorium and restrictions on enforcement of ipso factoclauses;
    • Temporary measures to alleviate pressure arising from the COVID-19 crisis were originally due to expire on 30 September 2020 – the government announced that certain of the temporary measures would be extended for either three or six months but notably adjustments to wrongful trading rules will not be extended and expired automatically on 30 September.

 

  1. What Measures Were Extended To Help?
  • In essence, the effect of the extension is that:
    • statutory demands made between 1 March and 31 December 2020 are void;
    • winding-up petitions presented from 27 April to 31 December 2020 are suspended where a company’s inability to pay is the result of COVID-19;
    • restrictions on the court’s jurisdiction to make a winding-up order will apply until 31 December 2020;
    • small business suppliers are exempt from the prohibition on enforcement of ipso facto clauses until 30 March 2021;
    • until 30 March 2021, certain of the conditions to the commencement of a moratorium are eased;
    • landlords are prevented from using commercial rent arrears recovery (CRAR) before 31 December 2020;
    • commercial leases cannot be forfeited for non-payment of rent or other sums due between 26 March and 31 December 2020; and
    • the current relaxation of requirements for general meetings, in order to facilitate virtual meetings, continues until 30 December 2020.

 

  1. What Should I Do Now?
  • If you have identified a potential problem, take advice now:
    • The sooner you react the more chance there is something that can be done;
    • Consider talking to us, we can review with you and maybe assist with looking to see if there are funding opportunities that you might make use of through Government CBIL / BBL funding before these options expire (at the end of November 2020 currently);
    • We can help you to look to introduce alternative funding sources, where the situation allows;
  • Failing any positive outcome from the reviews outlined above, we can assist you in making a decision to approach a corporate restructuring expert.

 

  1. What If My Company Does Need More Support – What Are My Options?
  • Insolvency
    • If the company is insolvent, there are different challenges to be faced by the directors.
    • Directors must then act in the interests of creditors (rather than shareholders) and can be held personally liable for breach of their duties in rare cases.
    • The question then becomes what can be saved and how?

 

  • Administration
    • If a company is unable to pay its debts (is insolvent) it may be put into administration.
    • It is then under the control of the administrator who is required to meet certain statutory objectives including rescuing the company as a going concern or, failing that, achieving a better result for the company’s creditors as a whole than if the company were wound up.
    • The company in administration benefits from a moratorium against creditors.
    • Administration may lead to various outcomes, including a Company Voluntary Arrangement (CVA, see below) or, ultimately, liquidation.
    • One common outcome is for all or part of the business of the company to be sold to a third party (the proceeds being used to repay creditors of the company so far as possible).
    • This may preserve jobs and business, but typically involves losses for some creditors (and shareholders).

 

  • Company Voluntary Arrangement
    • It may still be possible to save the company largely intact.
    • For instance, a Company Voluntary Arrangement may allow a company to avoid liquidation by coming to a binding agreement or compromise with its creditors with minimal involvement of the courts.
    • The company’s assets then come under the control of a supervisor, rather than the directors.

 

  • Compulsory liquidation
    • If directors are unable to turn around a failing company, it is likely that the company will ultimately face compulsory liquidation (being wound up by the court).
    • The company’s assets are then liquidated and proceeds distributed to creditors (and shareholders if sufficient).
    • In practice, the company has few, if any, assets to pay creditors.

Barrons has put together a helpful guide to running your business during the coronavirus crisis.