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Surviving Covid-19 - options and support for struggling businesses

The onset of the Covid-19 pandemic in March 2020 and the announcement of a national UK lockdown, imposed never before experienced restrictions on all activity in the UK and led to unprecedented measures being brought in by the government to prevent businesses being immediately impacted by the lockdown.

Seventeen months later and unsurprisingly, some businesses are still unable to operate at a pre-pandemic level. As and when restrictions are fully lifted, it is unlikely that the operations of any business will be a complete reflection of operations prior to the pandemic.

What has happened so far?

The early months of the pandemic saw the introduction of the Coronavirus Job Retention Scheme (CJRS), government-backed loan schemes, business rate holidays and VAT deferment schemes.

To date more than £57bn has been paid by the government in relation to the Coronavirus Job Retention Scheme* and more than £75bn has been loaned to 1.6 million business under the Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS).**

In addition to the monetary support being provided by the government, legislation was passed to suspend wrongful trading provisions set down in the Insolvency Act 1986, to prohibit the use of statutory demands and winding up petitions to collect outstanding debts and a prohibition on rent-related forfeiture of leases, meaning that landlords are unable to take action in relation to unpaid rents.

The extent of this crisis could not be foreseen and the original 12 week lockdown suggested by the Prime Minister on 23 March 2020 transformed, over the months that followed, into regional lockdowns followed by a second national lockdown. The continuation of the crisis has forced the government to extend the measures in place and whilst it appears that there is some light at the end of the tunnel, it will be some time before any realistic form of pre-Covid reality returns.

Recent government announcements

Government extends relief measures  

In June 2021, with a delay to the government road map for re-opening, the government has announced an extension to the prohibition on use of statutory demands and winding-up petitions by three months, from the end of June to 30 September 2021, to protect companies from creditor enforcement action where their debts relate to the pandemic.

However, there has been no mention of any extension of the temporary removal of the threat of personal liability for wrongful trading of directors. This expired on 30 June 2021 and the lifting of this temporary protection should cause directors to increase their awareness of the financial pressures facing the business.

Similarly, the temporary prohibition of termination clauses in contracts for the supply of goods and services where the customer enters an insolvency expired on the same date. Again, directors need to be on their game as they will no longer be compelled to deal with struggling companies.

Ban on commercial evictions has been extended to March 2022

The government has also announced it will extend the ban on commercial evictions introduced during the pandemic until 25 March 2022, which means that businesses that have had to remain closed during the pandemic and are unable to pay rent on their commercial property will continue to be protected from eviction. The government is also introducing legislation to ringfence Covid-19 commercial rent arrears and guide tenants and landlords to agree repayment plans. Where an agreement cannot be made, a binding arbitration process will be put in place so that both parties can come to a formal agreement to tackle debts. This relief relates to rent only – a breach of any other lease clause i.e. non-compliance with Insurance and repairing or use prescribed use will result in breach and landlord action.

Covid loan fraud fears

It was recently reported that the number of companies closing down after being struck off the Companies House register increased by 743 per cent during the first quarter of 2021 compared to the same period in 2020, raising fears about the amount of CBILS and BBLS loan fraud. ***

The Insolvency Service is already clamping down on businesses that have falsely claimed business loans introduced to help businesses during the pandemic. On 22 June 2021 it reported that a director has been disqualified for 12 years and five other companies wound-up in the public interest after fraudulently claiming Covid-19 business support. ****

New powers to tackle unfit directors of dissolved companies

Under new proposed legislation, the Insolvency Service will be given powers to investigate directors of companies that have been dissolved, closing a legal loophole that allows dissolved companies to avoid repaying government-backed loans.

The measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective to enable the Insolvency Service to tackle directors who have inappropriately wound up companies that have benefited from the bounce back loan scheme (BBLS) to support them during the pandemic.

If wrongdoing or malpractice is found, directors can face sanctions such as disqualification from acting as a company director for up to 15 years and potentially criminal prosecution.

The measure will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HM Revenue & Customs, unpaid.

What happens next?

Whilst all of the measures introduced by the government will have served to assist business during the pandemic, many businesses that have taken loans and deferred tax payments may find themselves, in the near future, in a position where they are unable to make repayments as and when they fall due.

The support / deferment measures being offered have lulled directors of troubled businesses into a false sense of security. If directors and their businesses want to reach the end of the tunnel, then now is the time for planning.

The number of corporate insolvency cases during the past 15 months are significantly reduced from normal levels. However, insolvency is a normal and vital function of any economy. In fact, the unprecedented support that the UK economy has received has highlighted the fact that for the trend of insolvencies to be significantly impaired, then the economy as a whole is not functioning at a normal level.

The concern is how many businesses may be laden with debt when all Covid-19 restrictions are lifted and ‘normal’ business is expected to resume.

What action do businesses need to take?

During the early stages of the pandemic, business owners were advised to develop cashflows and budgets. As the months of the crisis have stretched on, no doubt, such plans had to be changed continuously. How does yours look now?

Understanding what you expect your business to look like over the coming months, especially if debts are going to become due for payment, will be key. Identifying pinch points or matters of uncertainty, that may affect the future of your business, at an early stage will be invaluable in giving your business the best chance of success.

Business owners need to be aware of their duties and responsibilities and R3, the insolvency and restructuring trade body, have recently published a guide for directors that may be dealing with distressed businesses. You can access this publication here

If you have concerns that your business may struggle to repay its debts, whether big or small, seeking advice early is always the best solution. Early advice will provide time for planning and negotiating with creditors. Initial consultations are free and you may be presented with solutions that you did not know were available.

The Corporate Insolvency & Government Act 2020, which was introduced early in the pandemic, brought new insolvency / restructuring procedures which are likely to be extremely relevant to businesses that are facing financial distress because of the pandemic.

Moratorium procedure

Businesses that are, or are likely to become insolvent, but can be rescued as a going concern are eligible to apply for a moratorium which will apply for an initial period of 20 business days. The moratorium prevents any creditor taking legal action against the business while the directors restructure its cashflow. The moratorium can be extended with the consent of court and the restructuring procedure must be overseen by a licensed insolvency practitioner.

Restructuring plan

This is a court sanctioned restructuring under which businesses can identify classes of creditors with similar legal rights and agree a compromise on the treatment and outcome for each of those classes.

Businesses can also access the pre-existing restructuring processes governed by the Insolvency Act 1986 which are summarised below:

Company Voluntary Arrangement (CVA)

Businesses can propose an arrangement whereby debts existing at the date of approval are ring-fenced and the business contributes a portion of future profits into a pot for distribution amongst the arrangement creditors.

Administration

An administration procedure can be used if the business can be rescued as a going concern or if it will provide a better outcome for creditors than liquidating the assets. This procedure is often used if there is a viable business that can be traded and / or sold, enabling preservation of jobs and continuity for customers and suppliers.

Liquidation

This procedure can be used if a business has no future and its debts outweigh its assets but can also rescue elements of a business that are viable.

Advice and support

If you are worried about your business’s finances seek professional advice as soon as possible - early intervention is key to survival. Even if you are not worried talk to your advisors, they may be able to assist anyway.

Real concerns to be mindful of are:

  • Facing problems dealing with rent arrears or ongoing rent
  • Struggling to repay HMRC debt
  • Struggling to meet repayments due under the Bounce Back Loan Scheme or the Coronavirus Business Interruption Loan Scheme
  • Considering making staff redundant but unable to meet the cost of doing so.

However, a word of caution - take recommendations as to who you seek advice from but be aware that only licensed insolvency practitioners can act in regard to an insolvent business. Acting on advice from an unqualified source, which is almost certain to be too good to be true, will be just that. The aim is to resolve the problems of the business and not make them worse and that light at the end of the tunnel is no use if it’s the train coming towards you!

To discuss any corporate recovery, insolvency or restructuring issues you may have, please contact Jeremy Oddie or Julie Webster below.

Written August 2021.

Strength in Numbers

Summer 2021

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