Senior Partner Clarke Bell
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Troubling and uncertain times ahead for business owners

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Accountants are set to get even busier soon, as many of their clients will be facing a dilemma regarding what to do with their business in the wake of Covid-19.

6th Jul 2021
Senior Partner Clarke Bell
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As we emerge from the pandemic and the government reduces its support for companies which have been struggling, the directors of companies with cashflow problems and unmanageable business debts will be seeking advice from their trusted accountants.

John Bell reflects on the likely impact of these changes and considers how accountants can be helping their clients.

Government support measures

With England's full re-opening date delayed until 19 July, some of the government support initiatives have been amended to further help struggling businesses.

  • The temporary restrictions relating to winding-up petitions and statutory demands were due to end on 30th June - but have been extended until 30th September.
  • The ban on commercial evictions was due to end on 30th June - but has been extended until March 2022.
  • From 1 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 furlough scheme is due to end on 30 September but, from July, employers will be contributing 10% towards staff furlough payments increasing to 20% in August.

Navigating the new normal

A lot of directors will need their accountant’s expertise to help them steer their company on a steady course through these changes, especially those who have built up a lot of debt, including a Bounce Back Loan and an Overdrawn Director’s Loan Account. This historic debt is going to hold back many businesses, even those with a healthy order book.

However, coming out of lockdown into the “new normal” means there is a range of options available. So, it is important that accountants and their clients work together in order to pick the best option.

We know that a lot of company directors need help now because they have already spent their Bounce Back Loan and don’t have sufficient funds to repay it. 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 in affordable amounts, over a realistic period of time.

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

Options available

There are a number of options available for a company which have cashflow/debt problems where you will need to appoint an insolvency practitioner, including:

Creditors’ Voluntary Liquidation (CVL) – Liquidating a company voluntarily via a CVL, rather than a compulsory liquidation, is a good 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.

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) – 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 five 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 this option allows a successful business to emerge.

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.

It is optional for potential purchasers to use the PPP but insolvency practitioners must advise you of its existence. However, a lot of insolvency practitioners consider the approval of the PPP to be essential.

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.

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 utilised by a company that does not have a chance of recovery as it is not a means of postponing a formal insolvency procedure.

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, 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 with this, the monitor can file a notice at court to bring the moratorium to an end.

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 which your client might 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: There are many reasons why a company director might choose to dissolve their company. But it 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 give the availability of affordable fees nowadays to place a company into CVL.

In conclusion

With all the uncertainty still surrounding us all, company directors will be relying on the expertise of their accountants to help them select the best option for them to deal with the effects of Covid-19.

Accountants should, wherever possible, be in regular contact with their clients. If you’ve not heard from one in a while, it may well be because they are struggling and have ‘buried their head in the sand’.

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