It’s Insolvency, Jim, But Not As We Know It

It is now clear that 2020 is a year that mankind will in the future look back on as the year when established ways of living, interacting with our fellow human beings and earning a living were potentially changed forever.

Clearly the ultimate outcome of the Covid-19 pandemic is still far from certain, but many learned commentators are already anticipating that from an economic perspective the pandemic is very likely to bring about the worst recession since the 1930s. 

Such talk is unsurprisingly triggering fears of large scale closures of businesses resulting in a surge of formal corporate and personal insolvencies. However, it is to be hoped that with the benefit of responsible behaviour from all parties, including the regulatory authorities, the courts, insolvency practitioners, the legal profession, company directors, individuals and creditors a common sense approach which will be for the benefit of all parties and the UK economy as a whole can be found. 

It cannot be for the common good of the UK economy if unfettered enforcement action is undertaken and this is permitted by the legal system. Likewise those providing financial advice and support, including insolvency practitioners, must look to time to pay, negotiated settlements and informal and formal rescue procedures rather than too quickly viewing the end of a business as the only outcome. In this way the prospect of the best possible returns to creditors, if there is any opportunity to allow time for an ailing business to reflate itself, can be preserved.

As you may know, in recent days Debenhams has at the instigation of its directors entered what has been described as a “Light Touch” Administration to protect the company for precipitous action from creditors, including landlords, until the economic landscape further into and beyond the Covid-19 pandemic becomes clearer and the specific issues faced by the company and its creditors can be identified and hopefully addressed to better effect. 

The government has quickly put in place various schemes to assist business, such as the deferment of the payment of VAT for 3 months, the ability for employers to furlough employees and claim 80% of their pay back from HMRC under the Coronavirus Job Retention Scheme (“CJRS”), the availability of grants from local authorities to a large number of small business who are registered to pay non-domestic rates and the Coronavirus Business Interruption Loan Scheme ( “CBILS” ). There have been significant teething problems with the detailed understanding and implementation of these schemes in the early days since lockdown, but funds are now beginning to arrive into small businesses’ accounts from local authorities ( make sure that, where applicable, you have registered and your local authority has your account details ) and HMRC have advised that the portal for claims under CJRS will be open from 20 April 2020. HMRC anticipate that the average turnaround on refunds will be 6 working days. The truth is yet to be seen.

There do seem to have significant problems with CBILS. At the beginning of the second week in April it became apparent that up to that time only around 2,000 of 300,000 applications had been approved by the 40 approved lenders. Anecdotal evidence suggests that lenders’ appetite had been severely tempered by the government requirement that no personal guarantees would be required for loans up to £250,000. In addition, some lenders who prior to the pandemic had approved some routine loan applications within 2 days, now appear to have adopted stricter lending criteria such as a minimum loan of £25,000, a business achieving 80% profitability and having traded for at least 4 years and having adequate recent activity through its bank account. Further, while CBILS is stated to be for all businesses affecting by Covid-19, lenders have also been rejecting applications from businesses not in particular sectors. 

It is perhaps sobering that CBILS is in many ways the successor of the government’s Enterprise Finance Guarantee scheme (“EFG”). EFG resulted in the provision of only £3 billion in 11 years.

The National Association of Commercial Finance Brokers (“NACFB”) has called for government to extend CBILS to more alternative and non-bank lenders, support valuing and surveying to support SME finance applications and encourage the involvement of finance brokers in the application process. A lender is much more likely to approve a request for a loan which is for a definite amount supported by a clear rationale as to how the amount requested has been calculated, how long the loan is required for and how the loan will be serviced, i.e what were the assets and liabilities of the business immediately prior to the Covid-19 pandemic and what is the anticipated income and expenditure of the business and its proprietor going forward. These are all matters that finance brokers and advisers can provide assistance with to maximise the chances of a successful application.

It does appear that as the days pass that the government’s vision for the shape of CBILS is moving more in this direction. There is the prospect of a way forward for businesses if government moves to meet comment from relevant bodies and businesses in need seek the correct advice from the appropriate specialists.

It should be borne in mind that the current forbearance regarding the payment of VAT may cease in June 2020, and there is no forbearance for PAYE and Corporation Tax. The Lord Chancellor’s Department have indicated that for a similar period at least petitions for Winging Up Order and Bankruptcy Orders will not be listed for hearing, but directors and individuals should bear in mind that within a number of months it may once again be open to HMRC and any other creditors to utilise these proceedings to secure payment of arrears. 

Likewise, while government have indicated that directors of limited companies should not face actions from insolvency practitioners for Wrongful Trading in respect of continuing the trading of their company during the period to June 2020 when their company might be deemed to be cashflow insolvent, the government directive does not appear to cover general actions against directors for misfeasance, i.e breach of directors’ duty to the company and its creditors to act demonstrably in their interests. Accordingly, to protect themselves from such actions directors should therefore ensure that they take specialist advice regarding the detailed documentation of their decisions made to maintaining the trading of their business for the benefit of all parties. 

In the correct circumstances when all other informal avenues have been explored formal insolvency procedures such as Admininstration, Company Voluntary Arrangements and Individual Voluntary Arrangements do provide companies and individuals with legally binding mechanisms to reach agreement with their creditors regarding a staged plan for the reflation and recovery of businesses.

However, the key to success in supporting businesses and perhaps a new mindset towards the concept of insolvency by insolvency practitioners, and indeed all other parties and stakeholders, is all parties working together to support early action and the provision of the best solutions.

Clearly this process can be assisted hugely by the power of networking between professionals and business owners – typified, of course, by Intelligence Forums(“IF”)   – resulting in businesses obtaining help from key specialists and dialogue with creditors and their solicitors, many of whom are existing contacts of the writer as well as of the many of the members of IF.

Keep safe and take advice.