Since the start of the pandemic, one of the main concerns for business owners is the number of variables, and the unknown affecting their future strategy. With all the current ‘noise’ coming from customers, staff and the press, it’s important to cut through it and focus on the reliable sources of information; and use this information to take definitive actions to support your business to return to normalised trading as quickly as possible.
Price Bailey continue to work hard to keep up to date so that our teams are on hand to guide business owners through the array of initiatives. Below is an overview of the aid and initiatives available to business owners. Many of the brief descriptions have a link to a fuller article.
Last updated in the afternoon of 31 July 2020.
An overview of support and options
The Chancellor, Bank of England, British Business Bank and HMRC have created a combination of options for Companies requiring support. In simple terms, the new tools that business owners may be able to use are a combination of the following.
Bridging the gap – cash flow
Due to the volume of applications for funding being seen by the lenders, being prepared before approaching them for lending is important. You can listen to our podcasts How to prepare your business and approach your lender for a loan during COVID-19 or alternatively read our accompanying blog that provides top tips and things to consider as well as a live example.
Whilst these schemes are a relief to many, in our daily conversations with clients, we are observing three gaps. Firstly, in the middle of these two schemes, specifically amongst mid-sized businesses who are too large for CBILS and too small for CCFF; whilst the new Large Business scheme may fill the void, we are awaiting details that are to be released later in April 2020. Secondly, amongst those with structurally high levels of existing debt. Thirdly, pre-profit businesses who may struggle to access CBILS and for whom the normal ‘start up’ loan support is not sufficient and also where the shareholder base are not able to deploy further equity funding. We want clients in these three groups to know they are not alone and that we will continue to explore options for them and update this page.
Coronavirus Business Interruption Loan Scheme (CBILS)
For further information on this initiative, read our detailed article here or contact Simon Blake, who leads our Strategic Corporate Finance team.
At the close of business 26 July, 57,234 CBILS loans had been approved by the 105 lenders accredited by the British Business Bank (BBB). This is a further increase of 1,560 in a week and brings the total lent to £12.65b. 49% of applications continue to be approved, but this is down compared to previous months.
CBILS offers loans of up to £5m, where 80% of the facility is secured by the Government to provide comfort to the lenders. The loans can be taken over a maximum of 6 years with fees and interest being paid for by the Government for the first 12 months. Most lenders are allowing 12-month capital payment holidays from the start of the loan, so there is no repayment due till month 13.
Businesses applying for a CBILS loan will need to prove that they had a viable business that could repay the borrowing prior to COVID-19. The monies borrowed will be expected to support the business through the difficult time caused by the pandemic.
Bounce Back Loan Scheme (BBLS)
At close of business 26 July, 1.113m BBLS loans had been approved, an increase of nearly 30k in the last week. This totals £33.68bn an increase of £0.89bn in the last week. These numbers continue to grow although at a slower pace than previous weeks. Overall 82.5% of BBLS loans have been approved.
The Government recognised there was a need for businesses that were struggling to access the CBILS loan scheme. On 27 April the Chancellor announced that he would establish the Bounce Back Loan Scheme to help small and medium-sized businesses borrow between £2,000 and £50,000.
This scheme provides a government guarantee against 100% of the loan. Like CBILS the loan is up to 6 years in duration with no repayments during the first 12 months. Feedback is that the loans are client-led, meaning that the emphasis is put on to the client to confirm they can repay the borrowing through a standardised application. The funds should be available within days, and interest rates are a standard 2.5% after the initial 12 months.
Companies can transfer loans of up to £50,000 issued under CBILS to the Bounce Back Loan Scheme.
Coronavirus Large Business Interruption Loan Scheme (CLBILS)
For further information on this initiative, please contact Simon Blake, who leads our Strategic Corporate Finance team.
At the close of business 26 July, there had been another 29 approvals in the last week (16 the week before); taking the total to 457. This equals total facilities of £3.1bn (up £0.21bn) with 52% of loans being approved; the approval rate has been slowly increasing for this facility.
On Friday 3 April 2020, the chancellor detailed a new scheme, much like CBILS, but for larger businesses that did not meet the requirement of CBILS nor COVID-19 Corporate Financing Facility.
The new CLBILS offers loans of up to £25m, where 80% of the lend is secured by Government. This, as the name suggests, is for larger businesses with an annual turnover of between £45m and £500m. This scheme can only be accessed if an applicant has been unable to secure regular commercial finance, so it is advisable to contact your lender in the first instance to see what packages are available and suitable.
Lenders will still be expected to conduct their usual credit risk checks. This scheme allows lenders to specifically support businesses that were viable before the COVID-19 outbreak but now face significant cash flow difficulties that would otherwise make their business unviable in the short term.
The scheme supports a wide range of financing options including short term loans, overdrafts, invoice finance and asset finance. Businesses will remain responsible for repaying any facility they may takeout.
To be eligible, a business must:
- be UK-based in its business activity
- have an annual turnover between £45m and £500m
- be unable to secure regular commercial financing
- have a borrowing proposal which the lender:
a. would consider viable, were it not for the COVID-19 pandemic
b. believes will enable you to trade out of any short-term to medium-term difficulty
Businesses from any sector can apply, except for banks and building societies; insurers and reinsurers (but not insurance brokers); public-sector organisations, including state-funded primary and secondary schools.
Feedback suggests, like the CBILS scheme that any borrowing proposal would need to include a viability test. That is, were it not for the COVID-19 pandemic, would your business be considered viable by the lender, and for which the lender believes the provision of finance will enable your business to trade out of any short-to-medium term difficulty. The process of proving serviceability is built from understanding the fundamentals from the previous year’s financial accounts, and bridging the gap between these and the projections/budgets.
We are experienced in raising different types of funds for many different situations and demonstrating viability is something we often get asked to support in.
To find out more, please contact Simon Blake, who leads our Strategic Corporate Finance team.
Coronavirus Corporate Financing Facility (CCFF)
For further information on this initiative, please contact Chand Chudasama in our Corporate Finance team.
At the close of business 29 July, 277 businesses were classed as eligible to access the scheme and had been given a total drawing capacity of £81,245m. As at the 23rd 64 businesses had been supported with £17,460mn within the scheme (£280m in 7 days).
76 of the 277 businesses classed as eligible were not initially approved for the scheme, either not providing ‘material contribution’ to the UK or not at investment grade, but have since been classed as eligible but may not have yet been approved.
Available for at least 12 months, the CCFF will provide funding to businesses by purchasing commercial paper of up to one-year maturity, issued by firms making a material contribution to the UK economy.
This is the vast majority of the £330bn scheme that was highlighted by the Bank of England and the Chancellor. However, The Bank of England has already warned that many retailers will not qualify due to their credit ratings. As of 1 March 2020, Companies must be able to demonstrate that they were investment grade. Financial companies (which we interpret as institutions rather than services businesses) are not eligible to apply. Commercial Paper issued by leveraged investment or private equity funded vehicles or from companies within groups that are predominantly banks, investment banks or building societies are not eligible if securities are being issued by a finance subsidiary they should be guaranteed by its parent company.
There is no clear guidance so far on what is considered as a material contribution to the UK economy, but we expect it to include significant employment, UK revenue and tax payments, and playing an important part in a vital supply chain.
Commercial paper is an unsecured, short-term debt instrument issued by a company.
CCFF will purchase sterling-denominated commercial paper, with the following characteristics:
- Maturity of one week to twelve months
- Where available, a credit rating of A-3 / P-3 / F-3 from at least one of Standard & Poor’s, Moody’s and Fitch as at 1 March 2020.
- Issued directly into Euroclear and/or Clearstream
Non-standard features such as extendibility or subordination will not be acceptable.
If firms have different ratings from different agencies, and one of those is below investment grade, then the commercial paper will not be eligible. We believe that the minimum facility size is £1m.
Businesses do not need to have previously issued commercial paper in order to participate. However, it seems likely at this stage that Commercial Paper will need to be listed (i.e. tradeable), and that any dealing counterparties must be appropriately authorised for the purposes of FSMA 2000. This could create delays, complexity and enhanced compliance requirements for businesses that have not had to manage these type of securities before and therefore be a practical barrier to access.
It was positive to see that the bank will operate in both the primary and secondary markets, subject to the other side being appropriate.
We see this as an opportunity for businesses to not only inject capital to stabilise but to also improve corporate governance and the ability to access wider forms of capital in the mid-term. As concerning as these times are, there is an opportunity here for certain types of businesses.
To find out more, please contact Chand Chudasama from the Strategic Corporate Finance team.
The Future Fund (TFF)
For information on this initiative read our blog on The Future Fund: 10 terms and what to do next or contact Chand Chudasama.
At the close of business 26 July 510 TFF convertible loans had been approved (up 45 in 7 days). The total approved was £512.9m (up £44.2m in 7 days), with 62% of applications being approved (3% increase in 7 days).
TFF took some time to gain momentum, possibly due to understanding and the fact that loans are only classed as approved once the Convertible Loan Agreement document is issued.
TFF provides government loans of between £125k and £5m to high growth companies using a Convertible LoanNote (CLN). The loan will need to be at least matched by funding from private investors, and the company must have raised at least £250k in private third party investment in the past five years.
The CLN turns into the most senior class of shares when:
a. In the future, the business raises further capital that is equal to the whole bridge funding round;
b. On sale or IPO;
c. After 36 months, the loan will likely turn into shares, or, be repaid with a premium.
The business is eligible if:
- it is UK-incorporated – if part of a corporate group, only the parent company is eligible
- none of its shares are traded on a regulated market, multilateral trading facility or another listing venue
- it was incorporated on or before 31 December 2019
- at least one of the following is true:
- half or more employees are UK-based
- half or more revenues are from UK sales
Loans will have an 8% interest rate and looking at the application V approved figures it would seem that criteria are tight.
Applications close at the end of September 2020.
Grants & Rate Relief – What is available to you?
Local Authority (LA) Discretionary Funds
For information on this initiative read our Support for businesses that missed out on Government funding article or contact Matthew Hector.
Local authorities in England have been given a sizeable discretionary fund worth £617m to support businesses that have not been eligible for other small business or leisure grants. The largest grant available is £25k, this then drops to £10k, and the LA have discretion for any amount under £10k.
The fund has mainly been set up to support:
- Small and micro-businesses (under 50 employees)
- Businesses with relatively high ongoing fixed property-related costs
- Businesses that can demonstrate that they have suffered a significant fall in income due to the COVID-19 crisis
- Businesses that occupy a property, or part of a property, with a rateable value or annual rent or annual mortgage payments below £51,000.
It has been set up to support property costs in those sectors that have not been eligible for prior Support. Therefore, priority will be given to those in shared offices, market traders, bed and breakfasts and charity properties.
Although it has been set up mainly for the above, the LAs do have the discretion to use their local knowledge to help those in need.
Application closing dates vary from mid to the end of June.
Small Business Grant Funding
The Government are providing additional funding for local authorities to support small businesses that already pay little or no business rates because of small business rate relief (SBRR), rural rate relief (RRR) and tapered relief.
This will provide a one-off grant of £10,000 to eligible businesses to help meet their ongoing business costs.
You will be eligible if:
- Your business is based in England and
- In receipt of small business rate relief or rural rate relief as of 11 March and
- You are a business that occupies a property
Eligible businesses will be contacted by their local authority, though some local authorities have decided to operate an applications process. Any enquiries on eligibility for, or provision of, the grants should be directed to the relevant local authority. You can find details on your local authority here.
Price Bailey has been made aware that some councils have been expecting businesses to apply for the grant rather than the businesses being contacted directly by the council. Our advice is to check if you are eligible and contact your local authority if you are not already in the process of applying for the grant.
Retail, Hospitality and Leisure
There is not a sector or industry that has not been affected by the virus, but the retail, hospitality and leisure sectors were hit quickly; with the Government advising the public to stay away from establishments very early on.
A twelve-month business rate holiday has been implemented for the 2020/21 tax year for these sectors. Those receiving the retail discount in the 2019/20 year will be rebilled as soon as possible.
Eligibility for the holiday will be that your business is based in England and the business is in the retail, hospitality and/or leisure sector. For properties to benefit, they will be occupied hereditaments that are wholly or mainly used:
- as shops, restaurants, cafes, drinking establishments, cinemas and live music venues
- for assembly and leisure
- as hotels, guest & boarding premises and self-catering accommodation
There is a small business grant available of £10,000 to all businesses in receipt of small or rural business rate relief.
Grant funding of up to £25,000 for businesses in retail, hospitality and leisure with property with a rateable value between £15,000 and £51,000.
Enquiries should be directed to your relevant local authority. You can find details on your local authority here.
Specific Sector Support
For nurseries paying business rates, a business rates holiday will be implemented for the tax year 2020/21. You are eligible for the business rates holiday if:
- Your business is based in England
- Properties are occupied hereditament and are:
- occupied by providers on Ofsted’s Early Years Register
- wholly or mainly used for the provision of the Early Years Foundation Stage
There is no action required by the business owner. If you have already received your detailed bill, this will be revised as soon as possible.
For further information relating to the charity sector, please read What should your charity be thinking about amid COVID-19? Or contact Michael Cooper-Davis.
In early April the Government announced a specific cash pot for charities worth £750m. This funding will support frontline charities across the UK – including hospices of which £200m of the overall pot is aimed at, and charities helping domestic abuse victims and other COVID related needs.
It will be allocated and raised by:
- £360m from individual government departments to charities in England based on evidence of service need
- £310m for smaller, local VCSEs working with vulnerable people in England. This includes a £200m Coronavirus Community Support Fund which will be distributed by the National Lottery Community Fund
- £60 million in Scotland, Wales and Northern Ireland
- £150 million will be unlocked from dormant bank and building society accounts
- Match funding the public donations to the BBC Big Night In. Including the match funding, this raised £67m. The first £20 million of match funding went to the National Emergencies Trust appeal for smaller, local VCSEs.
As well as the above estate agents, lettings agencies and bingo halls will be exempt from business rates in 2020-21.
Governance – Protecting you and your business
Support for the self-employed
As at close of business 14 June 3.4m self-employed individuals had been identified as eligible for the scheme. 76% (2.6m) of these had claimed, with a total claim of £7.6b. The average claim was £2,900.
Phase 1 – Grant covering March, April & May, capped at £7,500, claim by 13 July.
The first phase announced 26 March offers individuals a grant of up to 80% of their average monthly trading profits, paid in one lump sum up to £7,500 (£2,500pm).
Phase 2 – Grant covering June, July & August, capped at £6,570, open for applications in August.
The second phased announced 29 May offers individuals a grant of up to 70% of their average monthly trading profits, paid in one lump sum up to £6,570 (£2,190pm).
Applications need to be made directly to HMRC, and funds are being paid within eight days. Claims can be made online here.
Eligibility is the same for both grants. Individuals can apply if 50% of their annual income is derived from self-employed work, and their average annual self-employed trading profit is £50k or less.
Individuals will need to prove they have been adversely affected by COVID-19. They do not need to have claimed phase 1 to claim phase 2; therefore if the impact has only been seen since July, the claim can still be made.
Coronavirus Job Retention Scheme (CJRS)
For updated information on this initiative, read our blog Changes to the Coronavirus Job Retention Scheme (CJRS) published 15 June or contacted Joanna Smye.
And our article Our experience of the Coronavirus Job Retention Scheme (CJRS) and Coronavirus Statutory Sick Pay Rebate Scheme (CSSP) published 28 May supports employers expectations of the scheme.
At the close of business 14 June, 1.1m employers (relatively unchanged for four weeks) had made a claim using CJRS. 9.1m jobs had been furloughed with a total claim’s value of £20.8bn. The scheme has been utilised most by the construction, retail and hospitality sectors.
The scheme implemented by the Government to safeguard jobs and reduce redundancies pays up to 80% of an employee’s monthly salary, capped at £2,500, who would have previously lost their job.
For further detail on the fundamentals of the scheme, please read our article on Coronavirus Job Retention Scheme.
Coronavirus Job Retention Scheme (CJRS) – HR support
To furlough employees, you need an agreement – The Treasury Direction says that to claim under the furlough scheme, the employer and employee must have agreed in writing that the employee will cease all work (para 6.7). Notification alone is not sufficient. This document also needs to be kept for five years. Further, as stated above, any reduction in salary is a breach of contract without express agreement from the employee.
Furlough agreements are required to include the time period for which the employee will be out of work. This time period will likely be the period that the Job Retention Scheme remains in place, subject to a minimum of 3 weeks. If an employee comes back to work after the set period and you do not require them to work still, you can ‘re-furlough’ them for a further period of time.
A furlough agreement is a temporary variation of the contract of employment, and the employees will revert to their normal terms following furlough, although some employers are using furlough agreements to introduce and agree on permanent changes such as the right to put the employees on short-time working or to temporarily lay them off.
This is a complex area of law, and legal advice should be obtained before making such changes.
In respect of contractual terms which have not been varied by agreement, the underlying contract of employment continues to apply during the furlough period, as do an employer’s statutory obligations which often override contractual terms, particularly around termination of employment, for example, timings of consultation on a collective redundancy process.
Our Employment Law team can draft furlough agreements at a set cost on a per company, rather than per employee basis.
To read some commonly asked questions to our legal team, please see our article An employment law Q&A for dealing with COVID-19.
Support With Paying Sick Pay – Coronavirus Statutory Sick Pay Scheme (CSSP)
Our article Our experience of the Coronavirus Job Retention Scheme (CJRS) and Coronavirus Statutory Sick Pay Rebate Scheme (CSSP) published 28 May supports the below.
For small and medium-sized businesses with less than 250 employees, two weeks Statutory Sick Pay (SSP) is able to be reclaimed per eligible employee absent due to COVID-19 (this includes both Coronavirus sickness and isolation absence) on or after 13 March 2020. Employees will not need to present a GP fit note but can be supplied an isolation note from NHS111 online to satisfy their employer.
The Coronavirus SSP Rebate Scheme is now open for employers to make a claim. The process broadly follows the same format as the Coronavirus Job Retention Scheme (CJRS) claims, for those also claiming through CJRS.
The information employers will need in order to make a claim is:
- Claim period
- Number of employees
- Amount claimed.
In contrast with the CJRS, you are not required to provide the individual employee’s names or NI numbers. For more information and updates on the application process, see Our Experience article here.
Claims can only be made for periods that have already passed.
If you have further questions regarding employment law and COVID-19, our Employment law Q&A article may support.
If you would like to ask one of our Employment Lawyers any questions regarding managing your workforce at this delicate time, please contact Joanna Smye from our Employment Law and HR support team.
Time To Pay
HMRC have announced blanket deferrals in VAT and Income Tax payments due in the coming months for all businesses and individuals. Even so, we expect that some will require further Support from HMRC during this difficult time. Time To Pay arrangements in our experience are commonplace for businesses who may need help with one-off cash flow issues: perhaps those with a large bad debt, or unexpected tax outcomes. Because of this, we have a large amount of experience in negotiating the terms and supporting with implementation if you would like some top tips, read our article Time To Pay Support with your taxes or contact Richard Grimster from our Tax team or Tim Smith from our Recovery and Turnaround team.
The Government are deferring VAT payments from 20 March 2020 until 30 June 2020. We expect this to be in place for a minimum of 3 months. All UK businesses are eligible. No application is required to access this deferral; rather, a business will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by the Government as normal.
In practice, businesses will not have to bring their VAT payments up to date until 31 March 2021. Businesses will need to cancel their direct debit mandate and will need to remember to set it up again in due course.
Deferral does not apply to any business paying VAT under the MOSS scheme. Any MOSS payments due still need to be paid by the usual deadlines.
Price Bailey expect this to be of significant benefit to many of our clients. If you are looking to understand how this deferral will impact your short or mid-term cash flow, or, to learn more about how the deferral may connect to other elements of your business planning, then please reach out to your normal Price Bailey contact, or Daphne Hemingway or Richard Grimster from the Tax team.
VAT and Bad Debt Reliefs
It is likely that businesses will incur an increasing number of bad debts as a result of COVID-19. Price Bailey would, therefore, like to take this opportunity to remind business owners about the possibility of making bad debt relief claims for VAT. For further information, read our article VAT and bad debt reliefs or contact Daphne Hemingway our VAT partner.
For any business in the current climate, there is a critical need to minimise the economic impact of the COVID 19 pandemic as well as to ensure, as far as possible, ‘normal’ day to day operations. For companies and groups with an international aspect, there are areas already having transfer pricing implications. Read our article Transfer pricing implications of COVID-19 to understand the implications and understand our thoughts on ways to mitigate risk. Alternatively, Jay Sanghrajka from our tax team is happy to discuss further.
An online application is available to file accounts late with companies’ house, for two months automatically and a further one month in exceptional circumstances afterwards.
A further update from Companies House means they will now automatically grant a three-month extension to the accounts filing deadline to companies and LLPs etc. if they apply for it. If they do not apply for an extension, the usual deadline and penalties will apply.
Businesses should seriously consider whether this is appropriate and possibly leave filing it until near the deadline. In particular, this relaxation on filing will not create a relaxation in filing of tax returns at this stage and so knowing tax liabilities often requires accounts being in a final position.
So too will it be important for businesses to have knowledge of their financial performance for agreeing on any TTP arrangements with HMRC who may not be as relaxed about late filings for example of tax returns when negotiating to defer the tax payments which fall out from those filing positions.
Importantly, filing accounts which cover performance for periods which have passed and show good results may be beneficial for ensuring that financing is available and credit scores are emboldened. The reverse, of course, is also true, and the Institute of Chartered Accountants in England and Wales (ICAEW) is providing some guidance for auditors who will struggle with wording around key matters in audited accounts such as “going concern” at this time of uncertainty; waiting, for now, may be the best solution.
Your lenders, shareholders or regulators may require financial reporting as part of your existing covenants, agreements or terms with them which should be reviewed before a decision to defer is made given there is no blanket relaxation on all financial reporting in the UK, just for statutory accounts for the pubic record at companies house.
We recognise that some businesses will require this service, and in appropriate cases, the relaxation is welcomed. If you would like to discuss it with us, please reach out to your primary Price Bailey contact in advance of your filing deadlines to ensure the appropriateness of a claim to extend. The form must be approved before the filing deadline and can be found here: beta.companieshouse.gov.uk/extensions.
For further information on this initiative, please contact William Wilson.
IR35 changes for the private sector have been delayed in response to COVID-19. HMRC has delayed the changes to the operation of IR35 for the private sector by 12 months. Further detail can be found by reading our article IR35 changes for the private sector delayed or by contacting Sarah Howarth, a tax specialist at Price Bailey.
Breach of Contract
Trading in today’s climate is difficult for everyone; even if your business has been managing to trade during the pandemic, it doesn’t mean that your clients or supply chain aren’t affected. Contracts are a hard and fast way of detailing how two or more parties will work together, but what happens when COVID-19 causes implications that mean a contract cannot be fulfilled. Read our article COVID-19: Breach of contract implications written by Heidi Berry, our commercial disputes lawyer.
Evicting a tenant and the implications during COVID-19
If you are a landlord or tenant and wish to understand how the Coronavirus Act 2020 can affect you read our blog Evicting a tenant and the implications of the Coronavirus Act 2020 by Heidi Berry, a Lawyer at Price Bailey.
Revised Audit Standards
Our audit team, like many, are getting used to the new ‘normal’. In December 2019, the international audit standards (ISA) regarding Going Concern were revised. This ISA was updated as a response to many high profile corporate failures in which the auditors faced criticism that they did not do enough to highlight concerns about the future viability of the business. To understand the impact of COVID-19 on Going Concern assessments for trading companies and charities read our article Revised Auditing Standard – ISA570: Going Concern or contact Suzanne Goldsmith, Senior Manager at Price Bailey.
Making Tax Digital V2 Delayed
Making Tax Digital (MTD) was introduced to the UK on 1 April 2019 as part of the Government’s plan to ease individuals’ and businesses’ tax monitoring and ensure they are paying the correct tax. Currently, the reform applies to VAT-registered businesses; during phase 2, the intention is that it will apply to every single business entity that is required to complete and file a tax return. Read our expectations of the impact of COVID-19 in our article Making Tax Digital Phase 2: Delayed until further notice or contact Chris Godsave, a partner at Price Bailey.
Businesses that have cover for both pandemics and Government-ordered closure should be covered; the Government and insurance industry confirmed on 17 March that advice to avoid pubs, theatres etc. is sufficient to make a claim. We recommend reviewing your insurance policy and speaking to your provider for further details.
Insolvency and Recovery – Reviewing the Support available and your options
Wrongful Trading Amendments
On 28 March 2020, Business Secretary Alok Sharma announced measures designed to support businesses experiencing distress as a result of COVID-19. These included the temporary suspension of wrongful trading provisions for an initial period of three months (from 1 March 2020 to 31 May 2020) which has later been extended until 30 June.
A business can be classed as insolvent if it can’t pay debts as and when they fall due (cash flow basis) or if the value of its liabilities exceeds its assets (balance sheet basis).
When a company is insolvent, the directors must continue to discharge their duties but have an overriding duty to act in the best interest of the company’s creditors.
If a business continues to trade whilst insolvent, it risks making the position worse for creditors, who may continue to supply goods/services on credit with no prospect of repayment.
Wrongful trading is a provision of UK insolvency law that is designed to deter directors from continuing to trade an insolvent business by making them personally liable for certain debts of the business.
To find out more how this may affect your strategy for trading out of the COVID-19 implications, read our article Temporary suspension of wrongful trading provisions or please contact Tim Smith.
Other amendments to insolvency law
BEIS is set to announce further measures to provide a life raft to otherwise viable businesses that are struggling to keep afloat.
It is currently expected that these will include:
- Rules to ensure ongoing supply of critical goods and services to businesses in an insolvency procedure;
- An extension of the statutory moratorium (currently 10 days) to protect companies from creditor enforcement while the business assesses available options;
- A new Court-based restructuring tool, akin to a Scheme of Arrangement.
Any new mechanisms or tools which will give businesses, directors and their advisers a framework to deliver a better (ideally consensual) outcome for creditors are most welcome.
However, the devil is in the detail. It is difficult to see how creditors could be forced to supply goods and services if payment could not be guaranteed or at least given priority in any subsequent insolvency process, for instance.
Further detail is expected to be set out shortly.
Our advice to directors and shareholders
Despite the temporary suspension, directors must still be conscious of not increasing avoidable losses to creditors. directors that do not act with due care and skill, or who intend to abuse government support, must surely expect a ‘reckoning’ in due course.
Insolvency Practitioners have a duty to assess the conduct of all directors in the run up to an insolvency process. The Insolvency Service retains effective powers that go far beyond a deterrent and can still disqualify directors.
It is important that good, clear governance and leadership is shown. Our advice is that the following is considered:
1. Be clear with the board on the collective responsibilities
Re-read your Articles of Association, shareholders agreements and even relevant sections of the Companies Act if needed, re read your directors and officers insurance policy. Make sure each board role has clear responsibilities, especially if directors are being placed on furlough.
The Board should meet as often as is necessary – for a mid-sized business this might be multiple times per week or even daily. Take notes of any meeting (record any virtual meetings). The fiduciary responsibilities of directors have not changed.
Dealing with directors who want to resign should happen quickly.
Ensure that the Board seeks professional advice from relevant experts, including a Licensed Insolvency Practitioner.
2. Document a turnaround plan
It is not sufficient to monitor financial statements and performance – directors will need to demonstrate they exercised reasonable care and took appropriate and informed decisions, to protect the interest of creditors.
Document what the business must change operationally in order to navigate the coming weeks and months. What is the impact (if any) on creditors?
Support the operational strategy with sound financial planning. A financial model that can handle scenarios is the ideal way to start approaching this, followed by written commentary.
A 13 week short term cash flow should be prepared to identify any short term liquidity problems before they become a crisis. This should be updated for actual performance against forecast as you progress.
Scenario based plans to address changes in performance are advisable – for example if a business expects reductions in cash due to revenue falling and/or slowing debt turn as customers conserve cash, or increasing costs due to foreign exchange risks, knowing what actions to take to cut costs, smooth liabilities and manage working capital, whilst protecting creditors, will be essential. Notes taken from discussions or emails with key debtors and creditors will help.
Adjust your plan and forecasts as your trading and operational situation changes (adverse or positive), for example, a prolonged “lockdown”, periods of staff illness, or new market opportunities.
3. Document your decision-making
Make it clear why the decisions you are in the creditors’ interest, and set out a brief rationale if need be:
- This might include considering the following questions:
- How will this course of action benefit, or at least not worsen, the position for creditors? How can you demonstrate this?
- Which creditors are you going to keep informed? Why?
- Lenders will often have information rights and an expectation to be kept informed as matters progress. They will only be reassured by proactive action and communication from the Board, but consider the message and frequency of communication. Agree this with them, their support may be vital at a later stage.
- What message will you share to customers, staff, landlords and trade suppliers, especially if you need their help later?
- Can you continue to take customer deposits?
- What will you be reporting to shareholders and how frequently?
- These can be challenging decisions – so it is advisable to keep clear succinct notes of discussions, actions taken and their rationale at the time. This will save time in the long run.
If you would like to know more about how our team can help you through some of these challenges and choices, please contact Tim Smith.
Recovery, turnaround, insolvency support and debt recovery
We recognise that many business owners will be concerned about cash flow and bridging this period, however long it may last.
If you would like to talk to one of our team about your options in regards to recovery, turnaround or insolvency routes, then please reach out to either Matt Howard or Paul Pittman from our Insolvency and Recovery team. Matt can also provide guidance on bad debt recovery options.
Price Bailey’s response to COVID-19
There is no doubt that many of you are concerned about how this pandemic will affect your business day-to-day and the impact on any upcoming strategic decisions. Please remember that we are here to support you with any immediate planning or personnel questions you might have, however small. Your Price Bailey contact will be happy to talk through your concerns and work with you to find the right solution for your business, so do give us a call.
As a result of the Government’s decision to move the country into a national emergency lockdown to mitigate the impacts of the virus, and the associated advice and restrictions on social contact, we have decided to close all Price Bailey locations from the morning of 24 March 2020.
Our Board, partners and teams were well prepared for this scenario.
You can be assured that we have a robust business continuity plan in place which will enable us to minimise the impact on our service to you. Since the beginning of the outbreak we have been making preparations for our people to work from home, and mobile telephone numbers have been added to the website for most contacts. No matter who you speak to, or what day of the week it is, you can be confident you’ll always get the same experience.
For more information, read our response to COVID-19.
Please take care of yourself and those you hold dear.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.