Back in late March 2020, just as the first lockdown began, Antony Batty made the point that many thousands of companies went from being profitable, going concerns to having almost no income but still plenty of overheads, with a swift and it was predicted a sizeable spate of insolvencies was the likely result – companies the UK could ill afford to lose.
The outcome, so far, has not been one of growing insolvencies, and this is almost entirely down to Government support and affected companies working as hard as they can to stay afloat. A recent survey by the Federation of Small Businesses suggests, however, that 250,000 small businesses could close this year as the third lockdown bites and exporters find that the additional red tape causes costs and time spent to increase.
In this article, our insolvency practitioners point out that the financial pressure that firms are facing is not just the fact that some are ‘falling though the cracks’ of government support, or the length of time the pandemic has been going on for, or even the Brexit effect. We highlight 4 key areas that are also causing increased pressure on businesses right now, and suggest how insolvency practitioners can help: – Repayment of CBILs to begin soon – Directors not fulfilling their duties when they are insolvent – Late payment of invoices – January tax return time Repayment of Coronavirus Business Interruption Loans The first CBIL repayments are now only 3 months or so away, which means that an extended lockdown period could force more businesses to the edge of insolvency as their income remains much reduced. It might well be that the Government will act on this and extend the interest free period, but as things stand, such repayments could force companies into insolvency.
Directors not fulfilling their duties at insolvency The fiduciary duties of directors at insolvency to their creditors and shareholders are unchanged by Covid-19. If insolvent, company directors must tread very carefully to avoid personal liability to creditors and the possibility of misfeasance claims, director disqualification, or even prison. It is also worth highlighting that if CBILs are mis-used and the receiving company becomes insolvent, Insolvency Practitioners have statutory powers of investigation, with personal liability for directors again being a likely outcome for the outstanding loan. The 4 key sins for directors to avoid (as detailed in the Insolvency Act, 1986) when their company is insolvent are:
• Wrongful Trading. This a civil offence and occurs when a company continues to trade whilst insolvent.
• Fraudulent Trading. This is a criminal offence where a director knows his/her company is insolvent and deliberately attempts to deny creditors what they are owed.
• Creditor Preferences. Directors must not show preference to one creditor over any other.
• Transactions at an Undervalue.
Any transaction for asset disposal must be at arms-length and full value. Directors must always be aware of their company’s financial position. Pleading ignorance is no excuse. Indeed, failure to recognise that a company is in financial difficulties is likely to be seen as irresponsible, negligent and proof of ‘unfit conduct’ by the directors.” Late payment of invoices The late payment of invoices in the UK has long been a major problem, especially those owed to small businesses by larger businesses. Recent Government figures show that in October 2020, late payments owed to small businesses had reached £23.4 billion, a situation that is likely to get worse as lockdown 3 continues. Indeed, the Institute of Directors has commented that nearly 40% of businesses had faced an increase in overdue commercial invoices during the pandemic.
At a time when generating turnover is paramount, the late payment of invoices will be enough to tip struggling companies into insolvency. January Tax Return Time As if the above were not enough, the annual tax return deadline is approaching on 31st January, and the end of January tax bill is likely to bring further financial hardship to companies – and directors – struggling to survive.
How Can Insolvency Practitioners Help? The threat of insolvency to businesses is huge and it seems inevitable that many under threat will not survive. One thing we know for certain, however, is that the sooner under pressure directors act, the better the chance of survival. Figures from R3 (the Association of Business Recovery Professionals), for example, show that over 40% of insolvent businesses are rescued by Insolvency Practitioners. Options range from providing access to finance to help turnaround to the breathing space that insolvency procedures such as Company Voluntary Arrangements and Administrations provide. Liquidation is not inevitable. Elaine Wilkins & Clive Fortis from the Bournemouth office of Antony Batty & Co advise “The earlier directors talk to an Insolvency Practitioner the quicker they can be advised on what measures to take to avoid breaching their responsibilities.”
www.antonybatty.com/about-our-insolvency-practitioners/bournemouth-office/