Trouble ahead for business owners: Navigating financial challenges

John Bell, director and founder of Clarke Bell, reflects on the impact that reduced government support will have on struggling businesses over the months ahead and shares some advice on how companies can best navigate these financial challenges

The next few weeks and months are going to be financially challenging as we tackle the aftermath of the pandemic. For the last 18 months, many businesses, large and small, across many different sectors have been struggling and have been able to rely on generous government packages to survive. However, that government support is set to be reduced and will tail off altogether in time. Those companies with cashflow problems and unmanageable business debts will have to face some harsh realities.

Supportive measures

England’s full re-opening date was delayed until 19th July, so some government support initiatives were changed and some extended to provide further help to struggling businesses. These included:

• The temporary restrictions relating to winding-up petitions and statutory demands were due to end on 30th June – now extended until 30th September.
• The ban on commercial evictions was due to end on 30th June – now extended until March 2022.
• The business rates holiday – from 1^st July those companies who were eligible for the business rates holiday will get a 66% discount until the end of March 2022. This means they will now have to find the money to pay 33% of their business rates.
• The Coronavirus Job Retention Scheme (furlough) is due to end on 30th September but, from July, employers will be contributing 10% towards staff furlough payments increasing to 20% in August.

Many business owners will have welcomed the extension to some of these measures but since July they will have had to find the money to be able to make some additional payments.

Adapting to a new normal

Throughout the pandemic, many directors will have built up a lot of debt, including a Bounce Back Loan and an Overdrawn Director’s Loan Account. Such historic debt is going to hold back many businesses, even those with a healthy order book.

However, as we emerge out of lockdown into the “new normal” there is a range of options available, so it is important to seek specialist advice from the likes of Insolvency Practitioners and accountants.

We know that a lot of company directors need help now because they have already spent their Bounce Back Loan and don’t have enough funds to repay the loan. In many cases, they will have spent a part of the Loan on household expenditures, such as the mortgage. This will need to be paid back – typically with a Time-To-Pay Arrangement which enables the director to repay the Overdrawn Director’s Loan Account (ODLA) in affordable amounts, over a realistic period.

Also, there are lots of companies that are only still trading because they have furloughed their staff – known as “zombie companies”. Without support from the government, many will face closure.

Available options

There are many options available for a company that is having cashflow/debt problems where you will need to appoint an Insolvency Practitioner, including:

Creditors’ Voluntary Liquidation (CVL) – a common way of dealing with an insolvent company. If a company is struggling and has decided to close down, then a Creditor’s Voluntary Liquidation (CVL) might be the best option. Liquidating a company voluntarily via this method, rather than a compulsory liquidation, is an effective way of protecting the reputation of the directors and dealing with the company’s debts, while fulfilling all the directors’ legal obligations.

When a CVL is the best option, an insolvency practitioner will need to be appointed who will guide company directors through the process. They will work with the directors, and their accountant, to collect all the necessary information to proceed with the liquidation. As soon as the CVL process starts, the company will need to stop trading.

Business Re-start – when a director wants to re-start their business after their old company has gone through the CVL process, there is often the opportunity for new funds to be injected into the business through a new company.

Company Voluntary Arrangement (CVA) – for a company that needs to re-schedule its debts over a more affordable time-period. A CVA is essentially a procedure which enables the company to put a formal proposal to its creditors for a composition in satisfaction of its debts which can last up to 5 years. The composition itself is an agreement where the creditors accept a sum of money as a way of settlement towards the debts which are owed to them.

A pre-pack administration – where a more fundamental restructuring of a business is needed, in many cases allowing a successful business to emerge.

A company would typically use a pre-pack administration if:

• it is experiencing cash flow problems and can’t pay creditors what they owe
• there is a potential buyer for the business
• it is likely that the purchasing company of the business can make a success of it
• the value of the business would be depleted if it were to be first placed into an insolvency procedure before being advertised for sale
• liquidation is not an option.

The key benefits of putting a struggling company into pre-pack admin are that it typically:

• saves more jobs – with some or all employees being transferred to the new company
• offers better return for the secured creditors
• preserves the value of the company due to the speed of the process – the longer the sales process is, the more likely the company’s value will be depleted as people (clients, suppliers and staff) become aware that the company is having problems.

In November 2015, the Pre-Pack Pool (PPP) was set up to provide independent advice for purchasers where a planned sale of a business to a connected party is being considered.

Details of the PPP can be found at: www.prepackpool.co.uk

It is optional for potential purchasers to use the PPP but Insolvency Practitioners must advise you of its existence (as stated in the Statement of Insolvency Practice 16). However, a lot of Insolvency Practitioners consider the approval of the PPP to be essential and will not accept administrations that have not been approved.

The business must be marketed for sale prior to the appointment of an administrator. This is to ensure that the very best outcome is achieved for creditors.

COVID-19 moratorium

Thanks to the Corporate Insolvency and Governance Act 2020, companies have a new solution to help them survive these difficult times.

On 26 June 2020 new rules were introduced to help companies facing considerable problems as a direct result of Covid-19.

This is a solution for a strong company, not a so-called ‘zombie’ company. This means that the government doesn’t want the procedure to be used by a company that does not have a chance of recovery as it is not a means of postponing a formal insolvency procedure.

The new rules have been designed to help companies that:

• Are facing cash flow problems due to Covid-19
• Were performing well before the pandemic struck
• Have been built on solid foundations
• Need some time to pay their bills and debts
• Will once again prosper when the pandemic is over

A key provision of the Act is the new ‘debtor in possession’ Moratorium procedure. This gives a business 20 business days’ protection from certain creditor action, as opposed to the previous ‘creditor in possession’.

A monitor, who must be a licensed Insolvency Practitioner, must be appointed to oversee the moratorium, but they will leave the existing management to run the company’s day-to-day business and directors will be in charge of the business.

The legal monitor is appointed to support the integrity of the moratorium process and ensure that the creditors’ interests are protected. Directors must provide any information required by the Insolvency Practitioner to carry out their functions. If directors don’t comply, the monitor can file a notice at court to bring the moratorium to an end.

Under new rules, the director can choose which Insolvency Practitioner to appoint.

During the moratorium period certain conditions apply, including:

• No winding-up petition can be presented to the company to force them into compulsory liquidation
• No order may be made for the winding-up of the company
• No administration application can be made.

Typically, a moratorium period would be followed by a CVA. We envisage previously strong companies with a healthy underlying business would require a “breathing space” CVA – lasting no more than 12 months.

Other options

There are other options to consider, where you would not need to appoint an Insolvency Practitioner, including:

Compulsory liquidation

This is when a company is forced to close by creditors who are unable to recover debts they are owed of more than £750.

It is recommended by most business advisors – including accountants, bankers and insolvency practitioners – that company directors avoid this option wherever possible, due to the negative impacts it has on them.

Dissolution

A company can be dissolved as long as it meets the following criteria:

• It hasn’t changed its name for the last 3 months
• It hasn’t traded or sold off any stock for the last 3 months
• It hasn’t been threatened with liquidation and doesn’t have any other agreements in place with creditors like a Company Voluntary Arrangement (CVA)

There are a variety of reasons why a company director might choose to dissolve their company. They might be looking to retire, or perhaps the business has fulfilled its purpose and there is no need for it to stay open.

However, it is important to be aware that the Insolvency Service has now gained the powers to investigate the directors of dissolved companies to make sure that the process is not being abused. (Previously, the Insolvency Service was only allowed to investigate directors of live companies or those going through an insolvency process.) This makes it more important than ever to only use this option when it is correct to do so.

Dissolution should not be used as a (cheap) alternative to liquidating a company formally, using an Insolvency Practitioner. The potential dangers to the directors are too great – especially given the availability of affordable fees nowadays to place a company into a Creditors’ Voluntary Liquidation.

What does the future hold?

Covid-19 has wreaked havoc on the economy but those directors who face up to their financial difficulties and seek professional advice can avoid sleepless nights and make plans for the future.