Help for Struggling Businesses Is Extended, With Some Subtle Changes

The Government’s decision to extend the easements provided by the Corporate Insolvency & Governance Act 2020 through to the end of the year will be widely welcomed by businesses that are experiencing cashflow difficulties brought on by the COVID-19 pandemic.

However, directors should be aware of some important changes to the rules and those facing financial difficulties should waste no time in seeking expert support. Simon Underwood, insolvency partner at accountancy firm Menzies LLP, outlines what company heads should know about the Government’s support going forwards.

The extension of the temporary insolvency measures put in place to protect businesses during the pandemic reflects the ongoing financial distress that many organisations are facing as the UK enters a second wave of coronavirus. Aligning with a general tightening of government rules, the step provides organisations with “extra time to weather the storm”, in the words of Business Secretary Alok Sharma.

Introduced in March, the original easements sent out a strong message to UK business managers, emphasising that the normal insolvency rules did not apply and that directors should focus simply on keeping their companies from going under. However, the Government’s decision not to extend its relaxation of the wrongful trading provisions indicates a significant change of stance. Directors who should have concluded that there was no reasonable prospect of avoiding insolvent liquidation but continue to trade could be liable for any losses incurred after 1 October, in the event that their business goes into liquidation. Directors in this position who are also applying for government financial support, for example, under the Coronavirus Jobs Retention Scheme, will also be more exposed to the risk of investigations from HMRC.

Businesses facing financial difficulties should also be aware that from December, HMRC will regain its status as a preferential creditor. This is particularly important for directors who have provided personal guarantees to banks or other financial institutions. This may result in the payment of higher sums under personal guarantees in the event of an insolvency, as financial institutions’ ability to recover their debts under floating charges is reduced. The fact that they will be able to recover lower amounts under their security is also likely to make them more risk-adverse when it comes to lending. This could make it more difficult for companies to secure this type of funding and cause banks to increase the cost of borrowing, both of which could have a negative impact on an organisation’s working capital.

Announced on 16 September, the extension to Government’s commercial eviction ban will also help to provide many businesses with breathing space, protecting those that are struggling to pay their rent as a result of the pandemic from being evicted. However, it’s also vital to bear in mind the challenges this development poses for landlords, especially in the event that tenants have run up significant rental arrears. In the long term, closer collaboration between landlords and tenants and a fresh approach to rental agreements will be required to find solutions to tenants’ financial problems. For example, this could involve the ability for tenants to reduce the amount of space they’re paying for based on their changing commercial needs or switch to a turnover rent model, where rental payments are based on the turnover of individual business outlets.

For those experiencing pandemic-related financial distress, remembering that “cash is king” is key to avoiding insolvency. Three-way forecasting is an essential decision-making tool, enabling directors to calculate their organisation’s likely future financial position and take steps to address any cashflow gaps before it’s too late. This type of modelling involves combining data for the organisation’s profit and loss, cashflow and balance sheets, allowing ‘what if’ planning to be conducted for a number of possible business scenarios. As turnaround measures take time to implement, forecasts should be undertaken for at least the next two to three years. If cash projections indicate the lack of a viable financial future for the organisation, businesses should waste no time in seeking the support of an insolvency specialist, who will be able to suggest the steps needed to transform the company’s financial fortunes and continue trading.

The extension of Government’s temporary insolvency measures will certainly have bought more time for UK business owners and directors feeling the financial effects of the coronavirus pandemic. However, it’s important to note that these measures won’t be around forever and in order to future-proof their organisations, directors must take a proactive approach to strengthening their cash position. By using three-way forecasting effectively and getting expert advice now, businesses can improve their long-term performance and keep insolvency at bay.

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