Updated: Feb 8
As we all know, thousands of businesses across a variety of industries have been adversely affected by lockdown and tier system restrictions from the outset of the Covid-19 pandemic.
The government’s business support packages offered to those businesses has been widely publicised, most noticeably the Coronavirus Job Retention Scheme (AKA ‘furlough’ scheme), local authority grants, and government-backed loan facilities. It has also been widely publicised that despite this support, many companies will still struggle to survive.
Owners of solvent companies have seen the effects of the pandemic as a deciding factor to cease trading and benefit from a members voluntary liquidation process. This is a commonly used process that has seen a spike in popularity due to the possibility of Business Asset Disposal Relief (formerly entrepreneurs relief) being scrapped and the pending changes to IR35 legislation (for more information on this see our recent article ‘How voluntary liquidation can help with IR35 tax headaches’.)
For insolvent companies, it is critical to consider what options are available, and why a company voluntary arrangement (CVA) should be a serious consideration.
Why will many businesses struggle to survive?
For many businesses, employee wages are the largest overhead. This is why the furlough scheme was initially well-received across the business community. However, with those businesses being unable to trade, other liabilities have continued to accrue for several months including rent, rates, taxes, suppliers, loans and other finance facilities becoming payable. The legal rights of these creditors to pursue claims for debts incurred as a result of Covid-19 remain severely restricted, but this is currently set to change in Q2 of 2021.
Had the restrictions been short-term measures, many businesses were confident in 2020 that they would survive with the available government support. Now, 3 weeks into our third national lockdown, the outlook is not so positive.
Many businesses have some major concerns, and here is an example of some queries raised with Ballard Business Recovery over the last couple of months:
When I can commence trading again, I need to hit or even surpass my projected turnover to break even. Should I be doing anything now to protect my company’s position?
As a prudent director, what happens when the relaxation of wrongful trading provisions is lifted and my company is technically insolvent? This would be a particularly relevant issue if that company was to subsequently enter a creditors voluntary liquidation, a company administration or a compulsory winding up.
Can the business once again become self-sufficient to pay employee wages, or will I have to make some of the employees redundant?
I deferred my tax liability with HMRC, how am I supposed to afford repayment now with the other accrued liabilities?
I obtained a bounce back loan but the 12-month no repayment, interest-free period is now coming to an end. The company doesn’t have the means to repay it. What are my options? For more information on this, give our article on ‘The Risks of Furlough And Bounce Back Loans for Directors’ a read.
I have several creditors, such as my landlord, chasing me for unpaid bills. What happens when the restrictions on statutory demands and winding up petitions (amongst others) are lifted?
These queries have no simple answer. The government has provided unprecedented support packages and temporary amendments to existing legislation in a bid to protect the economy. Only time will tell us what the aftermath will be.
What option are businesses currently favouring?
It may be of no surprise that the vast majority of business owners are currently stalling any strategic decisions simply to see what happens, i.e. when will the virus be controlled enough that the economy can fully re-open, and what other support packages, if any, will be offered by the government? Nobody has the answers to these questions and many business owners believe they have no choice but to ‘wait and see’.
Other companies who have perhaps fallen between the gaps of business support packages have seen no option but to implement an insolvency process, such as a voluntary liquidation.
The insolvency industry as a whole predicts that the number of corporate insolvencies will spike immediately after the government’s business support packages come to an end, this being April 2021 based on current announcements. We suspect that this will include a vast number of creditors voluntary liquidations, compulsory liquidations (once the winding-up petition restrictions are lifted) and administrations where perhaps there is still a business available to salvage.
But what can be done now to protect a limited company from these perceived difficulties? A Company Voluntary Arrangement (CVA) may be the answer.
What is a Company Voluntary Arrangement ?
A CVA is a legally binding agreement between a company and its unsecured creditors to pay liabilities over a specified period. More information on the company voluntary arrangement process and FAQ’s can be found on our website.
Some important advantages of a voluntary arrangement in the current climate are:
The company continues to trade (or can continue to trade once government restrictions are lifted) under the control of the current management;
As the company is still active, government support such as the furlough scheme can still be accessed where necessary.
The company is protected from any legal action by unsecured creditors.
A CVA may typically last up to 5 years, which hopefully allows sufficient time for the economy to recover and provides the business with some vital breathing space to get back to normality before financially committing itself to pay pre-CVA liabilities.
Providing the CVA is successfully implemented, it provides full debt forgiveness.
What difficulties need to be considered for a CVA?
The process of placing a company into CVA requires the director, advised by an insolvency practitioner, to make a proposal to its creditors. The proposal will rely on business projections and cash flow forecasts which can be difficult to prepare, especially in the current climate.
At Ballard Business Recovery, we work with industry experts to review your business and prepare robust cash flow projections that will support any CVA proposal. Any projection is, of course, based on a range of assumptions and a key assumption at present will be the date the company can fully commence to trade again. We can work with you to assess the current government vaccination proposals and predict when the business is likely to be able to trade again. From here, we can advise when the business is likely to be able to afford to make monetary contributions to the CVA and survive in the long term.
Another issue that has been introduced in December 2020 is that H M Revenue & Customs (HMRC) now rank as a secondary preferential creditor in any insolvency proceedings. HMRC’s preferential status basically applies to all unpaid taxes, except for corporation tax.
Why is this an issue? Preferential creditors are not bound by a CVA unless they consent to it. HMRC’s stance on being bound by CVA following the December 2020 law change remains to be seen and has been widely criticised across the insolvency industry. If HMRC does not consent for its preferential liability to be bound by the CVA, that liability will still have to be paid outside the CVA by the trading entity. We will work with you to confirm HMRC’s stance before finalising the CVA proposal to ensure that your cash flow projections account for all necessary payments.
If company liabilities are accruing, speak to us today to see if a CVA is appropriate for you and rescue your company!
Would you like to explore a CVA further?
If you would like to explore a CVA for your company, please contact us and ask to speak to our licensed insolvency practitioner.
All our initial advice is at no cost and you are under no obligation. Our main aim is to ensure that as many businesses survive Covid-19 as possible. Speak to us now and prepare for the future.