Insolvency rules to be relaxed – but cash remains king

The government announced over the weekend proposed changes to the UK’s insolvency regime in response to the disruption caused by coronavirus. 

The new rules focus on four areas, with the aim of minimising the risk of companies having to enter formal insolvency as a result of the government-imposed restrictions placed on everyday life.

We are still waiting for the details, but this is what we know so far:

A moratorium for companies while they seek rescue

This provides for a period of time during which creditors will be unable to take enforcement action against a company. Enforcement action will presumably include petitioning for a winding-up, appointing Administrators, forfeiting leases or repossessing assets. The company will then have a limited time to consider its options including restructure, refinance or otherwise.

Enabling companies to continue to purchase essential supplies

The government has already made clear that the safeguarding of essential supplies will only be available to companies subject to the moratorium process. We expect that the government will widen the definition of essential supplies, which is currently restricted to utilities.

Suspension of wrongful trading provisions

Ordinarily, a company director is deemed to be acting unreasonably by continuing to trade and obtain credit at a time when any reasonable person ought to have concluded that the company could not avoid insolvent liquidation. Under the current provisions if the deficiency to creditors increases from the date at which a reasonable person would have ceased to trade to the actual date of liquidation, the directors of the company may become personally liable for the increase (but not for the entire deficiency).

In suspending this provision, the government is acknowledging that many companies have become insolvent over the past few weeks. This is an attempt to enable boards to deal with their companies’ financial situation without fear of being personally liable if they do not cease trading immediately.

Restructuring plan

At present, directors of companies adversely affected by the pandemic have the following options:

• Seek further investment
• Enter into informal arrangements with their creditors
• Propose a Company Voluntary Arrangement
• Sell the business (probably by way of a pre-packaged Administration)
• Place the company into Liquidation

It is not yet clear what form a new restructuring plan will take and we will provide an update as soon as further details are available.

So what should you do?

Many companies are now facing the real prospect of becoming insolvent in the forthcoming weeks because of the restrictions put in place to deal with the pandemic.  Although many of the details are yet to emerge, it is encouraging to see the government‘s commitment to save as many of those companies as possible and provide much needed support to the economy in such challenging times.

Despite the proposed changes to the rules, the age-old maxim that ‘cash is king’ is more important than ever in the current environment.

There are steps that SME owners can take now to bolster their balance sheets and protect their cashflow – before they become insolvent.  One often-neglected area relates to debtors. It is important that you keep in touch with your debtors during this difficult time and make sure that you are very clear in your conversations with them. Try to resist the temptation of writing off (or waiting indefinitely for) what you’re owed.

That said, the reality is that many businesses are going to face pressures on their cashflows over the coming weeks, so you will inevitably have to introduce some flexibility when dealing with some of your most trusted clients. If you have a good understanding of your financial position and have spotted potential issues early, you may be able to agree an alternative repayment schedule with some of your debtors.

And if you need some help, or are coming to point where you don’t think you can agree a sensible repayment plan that works for your business, please do get in touch with us or your Escalate partner firm.