Here we look at the implications of withdrawal of some of the government COVID initiatives and the need for distressed businesses to take early professional advice.
The impact of COVID on businesses has been mitigated by unprecedented government support. Now that lockdown is easing a number of businesses are gearing up for the return to full trading. Many businesses are facing cash flow difficulties with low revenues and increased debt. Even if a business is sitting with a large cash balance it’s likely that they will also have a significant level of debt that will need to be repaid at some point. The various government initiatives are being phased out over the course of the next 6 months. Three key ones are:
- Suspension of winding up petitions ends 30 June 2021 – this means that from 1 July 2021 creditors will be able to commence winding up action against companies. For a winding-up petition to be successful, the creditor must prove to the court that the company cannot pay its debts. One way to show this is by a charge for payment. Any company that has an expired statutory demand or a CCJ is facing a real risk of being wound up and placed in insolvent liquidation after 30 June 2021.
- Suspension of wrongful trading is being withdrawn on 30 June 2021 – Wrongful trading is when a director can be found personally liable for the increase in creditors between the point that they ought to have known that the business was insolvent and the appointment of a liquidator. Although any creditor increase between April 2020 and June 2021 will not be caught, a director could be found personally liable for any increase from 1 July 2021 onwards. There are some questions to ask below to help assess whether a business is insolvent.
- End of furlough on 30 September 2021 – the Coronavirus Job Retention Scheme has been a valuable source of funding for many businesses. When this ends businesses will have to ensure that the revenue being generated is sufficient to make payment of the wages in full. If not, then redundancies will need to be made which will require a lump sum payment to be made which the company may not have. An insolvency process may be necessary as once an insolvency practitioner is in office employees will be paid any outstanding entitlements by the government.
Some questions to ask below to help assess how distressed a business is and whether a business is insolvent
Reliable financial information is key. The directors should ensure that they have the right reports to provide enough information to assess the financial position. Here are some questions to ask:
- Are the current assets less than the current liabilities?
- Are the total assets and foreseeable income less than the total liabilities and expected expenditure?
- Is the company reliant on bank loans with unclear renewal or extension options in order to continue its operations?
- Is the company unable to cover all its ongoing trading costs from income generated?
- Is there pressure from creditors who are chasing overdue payments?
- Have any creditors obtained decree /CCJs against the company or threatening legal action?
- Are there any potential significant contingent liabilities?
- Does a short term cash flow show that there are insufficient monies to make all payments as and when due?
- Does the company have significant HMRC arrears?
- Has the company broken a time to pay arrangement with HMRC?
- Are there rent arrears?
The more “yes” answers to the questions the more distressed the business is and the more likely there is a risk of insolvency. If all the answers are yes, its probably insolvent, but more analysis should be done to assess. Professional advice should be sought.
Getting professional advice from an insolvency practitioner
Business owners can be reluctant to seek professional advice from an insolvency practitioner. Part of this is the perception is that the only outcome will be insolvency. Directors worry that the advice will be that they must immediately take steps to appoint a liquidator. Sometimes it will be burying their head in the sand and not wanting to face up to the true financial position. It is difficult when a business has been built up over a number of years and provides people with employment. Usually, liquidation is only one of several options and we are frequently told by business owners that they wish they’d spoken to us earlier.
Advantages to speaking to us:
- To get clarity on the options and the pros and cons of each option.
- People tend to find that it empowering to understand what the worst-case position looks like and what the implications are for them and other stakeholders.
- We can advise on personal liability and how to mitigate this.
- We are available on short notice to speak with businesses free of charge.
- We will provide a written summary of the advice provided.
The earlier advice is sought the better, for example, a procedure such as a company voluntary arrangement takes time to put in place but it can mean that the shareholders retain the ownership of the business.
If a business answers yes to a number of the above questions and does not take steps to seek professional advice there is a very real risk that when the government initiatives are withdrawn the decision will be taken out of their hands by a creditor.
Get in touch
Henderson Loggie’s Business Recovery & Insolvency team are happy to answer any questions you have on this topic.