The Covid-19 pandemic and associated restrictions have caused serious financial distress across all sectors. With reduced trading, or no trading, many businesses are experiencing severe cash flow difficulties. While there are numerous Government supports and funding options to help businesses cope during the current crisis, unfortunately this is not always enough. Some businesses will require restructuring, re-financing or debt forgiveness to survive while others, unfortunately, will not survive.
In the current environment, solvency is a major concern for business owners.
Legislation defines a company’s solvency using one of two measures — a cash flow test (a business’s ability to pay its debts as and when they fall due) or a balance sheet test (whether the value of a business’ assets exceed its liabilities).
Cash shortages and reduced trading due to the pandemic restrictions mean that many businesses currently fail the cash flow test.
If you are in this situation, it is important to understand your options.
Business Rescue and Recovery Options
The viability of your business, and whether sufficient future cash flow will be available to formulate a restructuring plan, will determine your business rescue and recovery options.
Currently, there are three potential options. These are:
- Company Voluntary Arrangement (CVA) — The company enters into a formal insolvency process leading to a restructure. There is a legally binding agreement with creditors and a settlement is agreed with unsecured creditors. The company remains in the control of the directors but trades under the supervision of a Licensed Insolvency Practitioner for the duration of the CVA.
- Company Administration — The company enters into Administration and is protected for a period of time during which an Administrator formulates a business recovery plan. The company is under the control of a Licensed Insolvency Practitioner when it enters into Administration. Rescue options available through the Administration process include Pre-Pack Administration, sale of all or part of the business, or, eventually, a CVA. In the current COVID-19 climate, ‘light touch’ Administration protocols have been developed giving directors greater input in to the formulation of a restructuring plan.
- Informal Restructuring — A business can restructure informally without the need for a formal procedure. Usually, this involves utilising emergency funding such as Government-backed loans and/or entering into informal arrangements with creditors such as a Time to Pay Arrangement with HMRC.
New Insolvency Legislation
In addition to the above options, at the time of writing new insolvency legislation is working its way through Parliament. If and when enacted, the Corporate Insolvency and Governance Bill will present further restructuring options.
Among the proposed measures is a moratorium which would provide a period of protection to allow a company time to assess its options and propose a restructuring plan or CVA.
Also included is provision for a Court to force the implementation of a scheme of arrangement on creditors if certain conditions are met. These Covid-19 measures could be major lifelines for companies. If enacted, early action will be critical.
Where a business cannot be restructured and rescued, it is likely to face liquidation.
If the company directors have concluded that the company is insolvent, they must be mindful that their fiduciary duties change and their ultimate responsibility is to the creditors of the company. While the Corporate Insolvency and Governance Bill temporarily removes the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the emergency, directors must protect and preserve the company assets for the benefit of company creditors.
When entering Liquidation, a company has two options — Creditors Voluntary Liquidation or Compulsory Liquidation.
Covid-19 restrictions and lack of Court hearings mean it is likely to take longer for a company to petition for Compulsory Liquidation at the moment.
The most effective way of liquidating a company at present is therefore voluntary liquidation. This can be implemented by the directors and shareholders of the company who appoint a Liquidator subject to creditor agreement.
Control of the company passes to the Liquidator upon appointment. Amongst other statutory duties, the Liquidator communicates with stakeholders, secures and releases assets and assesses creditors’ claims.
An advantage of Voluntary Liquidation is that the process can be implemented quickly.