There can be no doubt that these are turbulent times for businesses and there has never been a better time to seek out specialist advice. Here, Azher Quyoom, Partner in our dedicated Corporate Recovery and Insolvency Team reviews the journey that we have been on so far, the support schemes that are still in place and the wider outlook for UK businesses. 

 On 23 March 2020, the UK Government announced a universal lockdown in the UK in order to prevent the rapid spread of the novel coronavirus and mitigate its impact. These orders were issued under emergency powers introduced under the Coronavirus Act 2020. 

From that moment, it was forecast that the lengthy restrictions on free movement caused by the lockdown would severely damage the UK economy, as well as having wider, significant socio-economic impacts. In response to lockdown, many businesses suspended trading activities in April and May 2020, albeit certain essential businesses were permitted to remain operational under strict control measures and some businesses were permitted to re-open in May and June 2020 due to their key status within the economy. 

Emergency measures 

In April 2020, the Government commenced the roll-out of emergency measures aimed at protecting businesses and individuals from the economic impact of the Covid-19 pandemic. Measures included: 

• Cash grants of up to £25,000; 
• Wage payment subsidies under the Coronavirus Job Retention Scheme (CJRS); 
• Covid Business Interruption Loans (CBIL); 
• Covid-19 Corporate Financing Facility; 

• Three months business rates holiday; 
• Statutory Sick Pay rebates; 
• Deferment of VAT and self-assessment tax payments; 
• Self-employment Income Support Scheme; and, 
• HMRC favourably agreeing to Time to Pay arrangements. 

New insolvency provisions 

In addition to financial support, the Government also brought in legislative measures under The Corporate Insolvency and Governance Act 2020, which became law on 26 June 2020. The aim of the Act was broadly three-fold:  

1. to introduce temporary provisions to protect businesses and individuals from the risks of enforcement action as a result of non-payment of debts for a period starting (retrospectively) on 26 April 2020 and ending on 1 October 2020;  

1. to introduce new insolvency procedures into UK insolvency law aimed at making rescue and restructuring a more likely outcome for businesses than currently being achieved under existing insolvency procedures; and 

1. to make changes and extensions to various corporate governance procedures and timescales during the worst period of the Covid––19 pandemic. 

The new insolvency provisions mentioned above include a Restructuring Plan, which is a scheme aimed at allowing companies to compromise the claims of creditors and members. It has unique features that extend current insolvency law including the much talked about “cross class cram-down”, which allows certain classes of creditors to outvote others in certain situations. 

Another new insolvency provision is the short-term Moratorium. This is a process designed to give companies breathing space (initially for 20 business days but extendable) whilst the directors attempt to formulate a rescue and restructuring plan with their creditors. The Moratorium is called a “debtor in possession” process because it is initiated by the debtor company and does not require the agreement of creditors for at least the initial period. During the initial period, the Moratorium is monitored by a licensed insolvency practitioner, but the company remains in the control of its directors. 

Moratoriums and Rescue Plans supplement the existing insolvency rescue procedures of Administration and Creditors Voluntary Arrangements (CVA). They have been implemented to place rescue and restructuring at the heart of their objectives and have been shaped after the perceived limitations of Administrations and CVAs in achieving this aim.  

Winding up of relief measures 

We are now approaching the end of two significant periods of relief measures implemented by the Government earlier this year. The first is the end of the temporary Moratorium on most enforcement action by way of winding up proceedings, which is scheduled to end on 1 October 2020 however the Government has laid legislation before Parliament on 24 September 2020 to extend the temporary moratorium until 31 December 2020. This amendment will come into force on 29 September 2020. 

The second is the phased ending of the CJRS (furlough scheme) on 31 October 2020 and its replacement with the Job Support Scheme announced by the Chancellor on 24 September 2020 (JSS). JSS provides welcome help to many employees following the ending of the furlough scheme however, on first view, it is less financially favourable than its predecessor. 

Both the moratorium on enforcement action and CJRS are designed to bolster the UK economy by safeguarding companies and employees during the pandemic and both schemes can point to a good level of success in achieving this aim. 

The future outlook 

The risk that we foresee however, is that the UK economy has taken a much more damaging downturn than predicted, and for a much longer period than forecast. Lockdown easing measures are only recently coming into play for businesses, allowing greater freedom to open and operate but we are far from being back to normality in any sense of the word with the Prime Minister’s announcements made on 22 September 2020 highlighting the unpredictable effects of the pandemic on economic activity.  

Put simply, the pandemic has caused businesses to suffer sharp falls in sales, income and profits whilst at the same time causing an accrual of debt through the non-payment of existing debts and the assumption of further debts through schemes such as CBIL. 

Whilst furlough has taken some of the immediate pressure off businesses by taking the lion’s share of wage costs off business balance sheets and the Job Support Scheme will provide some continuity for certain employees, it is clear that businesses are still faced with tough decisions in the months ahead, particularly those businesses that rely on consumer driven spending.  

The extension of time to pay loans and debts only extends to certain types of debt and does not include items such as trade debts and rent. The Job Support Scheme, on first view, appears to be less generous and less universal than the furlough scheme it has replaced, and it requires businesses to retain part time staff rather than make redundancies. 

The fundamental question, therefore, is what happens next if businesses continue to trade on with reduced income and accruing debts?  

Unless businesses can devise plans to deal with their debts, pending the improvement in sales and profits, then there is a real risk that they will become insolvent on either a cash flow basis or balance sheet basis.  

The Government has not extended the temporary moratorium on wrongful trading meaning that directors can once again be held liable for debts which are incurred after the business becomes insolvent and there is no reasonable prospect of repaying those debts at the time that they were incurred. The rules governing directors conduct also remain in place meaning that, notwithstanding the temporary blocks on enforcement action against companies, directors’ must actively manage their companies’ finances to ensure creditors are not adversely prejudiced. 

The real risk now is that directors of insolvent companies may unknowingly fall foul of existing rules on directors’ duties under the Insolvency Act 1986 and Companies Act 2006 notwithstanding the apparent protections implemented under temporary legislation to prevent evictions, forfeiture and debt collection by way of statutory demands and winding up petitions. 

If businesses do find that they are forecast to struggle in the coming months, even after taking into considering the Chancellor’s raft of COVID 19 relief measures announced on 24 September 2020, then now is the time to consider insolvency options. Insolvency does not mean business closure, far from it. Restructuring often leads to the continuation of a business but in a remodelled format that is more resilient to the prospects and challenges that that business faces. 

CVAs are likely to feature heavily in rescuing businesses and helping them to survive, and we also expect to see use of the Moratorium process and Administrations. All of these measures are designed to ring fence old debt with a view to achieving the survival of the business as a going concern. 

Restructuring Plans will also have a role to play in the rescue of businesses. However, at present, it is yet to be seen whether this new process will be more widely used than CVAs and/or Administrations. 

If you are considering your financial position, then we have specialist lawyers who will be able to guide you through your options. We work closely with accountants, and insolvency practitioners and offer free initial consultations. If you are looking for help and advice, talk to the team today by emailing azher.quyoom@andrewjackson.co.uk or calling 01482 325242.  

 

Correct as of 6pm 24.09.2020