There is no escaping the fact that the UK government has committed heavily to business support during COVID 19. Whilst there have been some notable exceptions, many companies have benefitted from the various financial relief packages available, including Corona Virus Business Loans (CBILs) and Bounce Back Loans.
Although the government covered interest payable on support loans for the first 12 months, we are quickly approaching the time when the first payments will need to be made.
For companies which have been able to weather COVID, this will not be an issue, but for firms whose trading performance is under threat, the moment of realisation is on the horizon.
The COVID period has accentuated normal market forces. For companies whose trading pattern has been interrupted, they can face mounting debts, as fixed costs begin to outweigh limited income. Even if they have had state support, it may not have fully bridged the financial gap, so each month of survival means eating into financial assets and incurring debt.
Financial difficulties do not arise simply from a difficult trading environment. There are some firms which have traded relatively well during COVID but suffered because their debtors have been unable (or unwilling) to pay their bills, sometimes in the interests of their own financial self-preservation. In this sense, some firms are debt victims through circumstance, not design.
Whatever the cause of mounting debts, they are a real barrier to the future progress of a firm. The harsh reality is that a limited company can be wound up, or liquidated, if it cannot pay its debts. Creditors can apply to the courts to have their debts paid, in the form of a court judgement of a statutory demand.
For companies who are faced with mounting debts and the prospect of insolvency it is worth remembering that early, proactive action is the best approach.
If a company is in debt, there are many people who can provide advice to the business owners and directors. Regulated finance brokers can sometimes re-structure debt, to help weather the storm. However, there are other less scrupulous operators arranging inappropriate further funding and charging high fees for the privilege.
It is tempting for company owners to put their heads in the sand and cling to a mistaken optimism that their financial situation will improve. However, it’s also important to recognise that company law prevents directors trading when there is no reasonable possibility of remaining solvent.
Faced with embedded levels of debt, it’s important to act early and seek impartial advice from a Licensed Insolvency Practitioner. An initial conversation does not mean that a company’s directors will automatically be on the path to insolvency. Their role is to have a full and frank conversation and help company owners assess their financial position in full, with a clear view of their options.
If considering insolvency, it is imperative to choose a licensed insolvency practitioner, which is a highly regulated role. There are many people describing themselves as ‘insolvency advisers’ but they are not necessarily licenced insolvency practitioners. Reputable insolvency practitioners (IPs) will happily provide evidence of their qualifications. The Insolvency Service provides an online register of licenced IPs.
The role of an IP is to provide clear guidance and advice to the directors and owners of companies in financial distress, including a realistic assessment of options and actions. Their initial consultation is often free of charge. Once appointed, they will work with creditors, arrange for assets to be valued and make sure that company matters are managed to meet the Insolvency Act 1986.
If the prospect of re-paying government loans is fast becoming a moment of financial reckoning, it’s important to seriously consider the financial viability of your firm and have an initial conversation with a licensed insolvency practitioner.