There has been an increase in the number of companies going into administration compared to other forms of company rescue (for example Company Voluntary Arrangements). “Light touch” administrations are now possible under a consent protocol, where officers of the company will be permitted to exercise certain powers and manage its day to day affairs during the pandemic, subject to the supervision of the administrators. CVAs remain an option but are a challenge, as rates of return for creditors will be difficult to predict and creditors are likely to become progressively more hostile as we near the end of lockdown.
The government has proposed a three month suspension of the “wrongful trading” provisions of the Insolvency Act 1986, to ease the anxiety of directors seeking to trade their companies through the current crisis. There is also a proposal to void statutory demands and winding up petitions, primarily by landlords but this may extend to other creditors. In addition, there has been discussion of a separate option of a moratorium of up to 28 days, where no insolvency proceedings may be brought by a creditor.
As a company director:
- Be prepared to make cost savings measures now; consider the support that is available through, for example, the Coronavirus Business Interruption Loan Scheme and your ability to service loans; cash remains key, so take steps to maximise your cash reserves and see if you can negotiate with creditors for the extension of payment terms;
- If you are concerned about the solvency of your business, take professional advice as soon as possible, as if this is done early then a turnaround restructuring solution or orderly formal insolvency process can be implemented;
- Do not assume that the government’s suspension of the wrongful trading provisions will definitely come to your aid, especially if there was in reality no prospect of avoiding liquidation before March 2020. There are also other claims for misfeasance, preferences and transactions at an undervalue available to a liquidator and not suspended. If you are facing insolvency, look carefully at prior transactions that may require an explanation and return monies where appropriate;
As a creditor:
- Continue to look for tell-tale signs of distress from companies you do business with, such as longer delays in paying invoices, part payments, requests to renegotiate payment terms, orders dropping and redundancies. Review “Covid-19 excuses” critically to see if they are the genuine cause of distress;
- Decide whether you want to deal in the future with the business in question and either negotiate fresh terms, or temporary terms for the duration of the crisis, or alternatively cut ties and follow an aggressive debt recovery strategy, through the threat of winding up proceedings or otherwise, so that you are one of the first in line to receive a settlement payment.