With the fallout from the pandemic hitting many businesses, those considering insolvency should look at the broad gamut of options on offer to avoid winding up the company. Matthew Padian, managing associate, explains.
Since the first UK lockdown, businesses have benefitted from a slew of government measures designed to steer them through the subsequent economic crisis. This includes the moratorium on landlords forfeiting commercial leases for non-payment of rent, the furlough scheme, and business rates relief for retail, hospitality and leisure businesses for the 2020/21 tax year.
Additionally, there have been restrictions on winding-up petitions and a so-called ‘suspension’ of the wrongful trading laws for certain periods, as well as funding via grants and coronavirus loans.
However, as matters stand (noting the extension rumours due to the roadmap to the end of lockdown), these measures are expected to ease soon, as pressure mounts for a return to ‘normal’. So, what risks might businesses face once support measures end? And, what can they do to weather the storm?
The risks coming down the tracks
The risks for companies once support measures end will vary depending upon the sector. Generally speaking, landlords will look to recover unpaid rents from tenants, and companies in need of funding may find lenders reluctant to lend to those with significant Covid-19 debts.
For retailers and restaurateurs faced with overcoming the decline in high-street shopping and eating out, many may struggle to pick up lost ground as social distancing measures continue. Whilst all businesses will want to move forwards, many will still be hamstrung by debts accrued over the last year.
If a company is insolvent or in danger of becoming insolvent, directors must be mindful of their duties to creditors, and what they should and should not do. For example, directors must be wary of wrongfully trading as they can be ordered to contribute to the company’s assets.
A director can be liable for wrongful trading where they continue to trade at a time when they knew (or should have concluded) that there was no reasonable prospect of the company avoiding insolvent liquidation and they fail to take steps to minimise loss to creditors.
Directors should also avoid certain transactions in the run-up to insolvency that may be challenged later. These include transactions below market value (such as selling an asset at a knock down price) and doing anything that may put a creditor in a better position than it would otherwise be in on an insolvent liquidation (eg, granting security to a creditor for an existing debt).
For businesses not yet at the end of the road, there may be some solutions short of calling in an insolvency practitioner. These include amending banking facilities such as relaxing covenants or extending their maturity, capitalising debt investments, or offloading non-core subsidiaries.
If insolvency or creditor action is a real possibility, a formal rescue or insolvency procedure should be considered. Fortunately, we now have two new rescue procedures thanks to the Corporate Insolvency and Governance Act 2020. These are in addition to existing alternatives such as administration, liquidation, and the company voluntary arrangement (CVA).
Accordingly, companies can now apply to court for a free-standing moratorium outside of administration. This is aimed at those in need of breathing space, as the directors consider that the company is, or is likely to become, unable to pay its debts. Ideally, the moratorium should give a company time – 20 business days initially (but this can be extended) – to resolve its situation.
During the moratorium, the company cannot be put into administration or liquidation and enjoys a payment holiday for certain debts. The directors remain in control of the business (unlike with administration or liquidation), although the company’s affairs are supervised by an insolvency practitioner who acts as a monitor.
Companies can also now seek a restructuring plan. This shares some of the characteristics of a scheme of arrangement but has the unique ability to ‘cram down’ creditors who reject the plan provided certain conditions are satisfied. This means creditors can be bound by the arrangement without having voted for it. The restructuring plan is appropriate for larger companies (Virgin Atlantic and Pizza Express were early users), given the costs of putting it in place, which requires court approval.
Pros and cons of restructuring
Each restructuring tool has its own pros and cons. CVAs, for example, have proven popular with high-street businesses as a way of achieving rent reductions without having to negotiate with individual landlords. They also enable directors to remain in day-to-day control of the business, without the immediate threat of investigation by an insolvency practitioner into previous conduct.
Administration, by contrast, may enable an owner to salvage the part of the business they like, whilst leaving any unwanted assets and liabilities behind. However, administrators must undertake a marketing exercise whenever selling a business in administration, potentially allowing other bidders to emerge. Reforms are also expected this year, which may limit so-called pre-pack transactions by mandating a review of administration sales by an independent evaluator where a business is sold to a connected person.
The key message is that there are a number of options available to struggling companies over the coming months. Whilst each of these will need to be explored carefully, keeping the intended companies’ unique requirements front of mind when choosing a recovery option, they should offer a lifeline to businesses as government measures are eased.
This article was first published in Accountancy Daily, read here.