Roadmap out of lockdown

Wednesday, 19 May 2021

Begbie Traynor guide for Covid-19 distressed businesses

The series of national lockdowns implemented due to Covid-19 plunged businesses into hibernation, particularly the retail, hospitality, and entertainment industry. As we ease out of another lockdown, social distancing measures continue to reduce customer capacity, resulting in an extensive overhaul of business operations, the practical roll-out of services and the reopening of shops.

As we return to normality following the globally championed roll-out of the vaccine programme, the cracks on SME balance sheets are starting to show, and depleted cash flow supplies are becoming more apparent. Hiding away from seeking professional advice could lead to the further deterioration of your business as government support is slowly withdrawn and emergency Covid-19 loan repayments fall due.

To remedy the financial health emergency encountered by your business, you will need to act early in the hope of facilitating a rescue.

Are there solutions to rescue my business?

If your business can be rescued by undertaking a recovery or turnaround procedure, a licensed insolvency practitioner will be able to advise you on the most appropriate route forward.

Company Voluntary Arrangement (CVA)

If creditors continually chase you to recover outstanding funds, a CVA can help you settle the situation by reaching a middle ground. Entering negotiations with creditors to propose affordable repayments can help you put an end to creditor pressure and tackle your debt build-up. A CVA is a legally binding payment agreement typically lasting three to five years.

The standard CVA process can also be speeded up under fast track, taking an average six to eight weeks to come into force. Eligible businesses can take advantage of the fast track CVA, enabling them to continue trading, employing staff, and working with the supply chain, while creditors will recoup more through a CVA than they would if the business went into administration or liquidation. A fast track CVA is ideal for agile smaller businesses that are more able to readapt and readjust.

Time to Pay Arrangement (TTP)

If you are falling behind on tax payments to HMRC, such as VAT, Corporation Tax or PAYE, accessing the Time to Pay scheme can help you arrive at a repayment arrangement. TTP arrangements historically would be granted for up to one year, although in light of the pandemic it would be hoped that this might have been loosened and that longer repayment periods might be allowed.

Company Administration

This is a formal route for financially distressed businesses with substantial asset value that can be realised to fuel creditor repayments. If creditors threaten legal action against a debtor company, entering company administration can lend some breathing space and protection against winding up petitions throughout the administration process.

By rebuilding the financial health of your business, it will be resilient and ready to face any further economic uncertainty as we seek to exit from the Covid-19 pandemic.

Liquidation

There are, of course, further options when a business is either beyond rescue, or when its directors no longer want to continue running the company for any number of reasons.

Solvent Liquidation (MVL)

This process is used where a business is profitable and has reserves of cash or assets, but it is no longer needed, perhaps due to retirement, or if the director is moving on. The company can be closed down by way of a Members’ Voluntary Liquidation (MVL). This allows for the company’s assets to be distributed to shareholders in a tax-efficient and cost-effective manner before winding down and closing the company. MVLs are typically only suitable for those companies with in excess of £25,000 to distribute.

Insolvent Liquidation (CVL)

A CVL is a formal insolvency process for insolvent limited companies or LLP’s. If your company is experiencing extreme financial distress, and there is no realistic chance of being able to turn around its fortunes, liquidation is the only realistic option, particularly when it comes to ensuring you do not worsen the position of your creditors. For some businesses this may mean that they have to cease trade immediately in order to prevent further losses being accrued, while others may be able to continue to trade temporarily if this would allow for a better financial return for creditors.

All of these routes can be pursued under the guidance of a licensed insolvency practitioner.

Gauging the financial impact of Covid-19 economic uncertainty

Regularly tracking the financial health of your business and keeping tabs on company cash flow can help steer your business away from falling into a neglected state. Businesses across the country are continuing to absorb the financial pressures deriving from the pandemic and are likely to remain in limbo until government support comes to an end.

The Coronavirus Job Retention Scheme (CJRS) is due to end in September 2021, along with additional support measures such as the Self Employment Income Support. Once this protection is withdrawn, businesses across multiple industries will likely find themselves in fatal financial predicaments that could risk company closure if left unsolved.

To conduct a free business health check in light of Covid-19, contact Partner Ken Pattullo