Emerging from the pandemic: challenges and solutions for struggling businesses

In the year leading up to lockdown in March 2020, there were 18,000 corporate insolvencies. The year following lockdown, this figure dramatically dropped by over a third to 11,000.

With the significant reduction in corporate insolvencies, it could be suggested that the Government support has actually been too effective and companies which ought to have entered an insolvency process have avoided doing so due to a mixture of financial support and restrictions on creditors, in particular landlords.

In this article, Restructuring & Insolvency partner Cory Bebb discusses the ways in which the pandemic has reduced the usual triggers for an insolvency process.

Triggers for an insolvency process

The usual triggers for an insolvency process – directors, banks, landlords and HMRC – have all been inhibited in some way over the last 18 months.

When HMRC suspended its collection of tax debt over the pandemic, the national tax debt rose significantly. In January 2020, the national tax debt stood at £16bn, which increased by £26bn to £42bn in September 2021. HMRC restarted its collection activity in June of this year.

A cornerstone of the UK tax system is that HMRC does not do deals, and so the full tax has to be paid at some point. Companies which would have otherwise failed in the last 18 months due to unpaid tax debt, will no doubt fail in the next 18 months. This is alongside companies who become unable to pay tax debt in the ordinary course of events, pandemic-related or otherwise.

Landlords have also been subject to restrictions on their ability to collect rent, forfeit leases or even use the threat of forfeiture to secure the payment of unpaid rent from tenants. Whilst this has no doubt helped struggling tenants, it of course has not helped struggling landlords, many of whom are small private landlords. This pain for landlords will continue until at least March 2022.

Directors of companies in difficulty, perhaps buoyed by the suspension of liability for wrongful trading and a lack of pressure from HMRC, the banks and landlords (whilst being financially supported with Government-backed loans and the furlough scheme), have managed to keep their businesses afloat. With the restrictions and financial support coming to an end, their minds will be focussed on whether they can continue. If there is no light at the end of the tunnel, an insolvency process will become unavoidable.

The next 12 months will inevitably see the emergence of delayed insolvencies (those which would have occurred in any event absent the pandemic) and also pandemic-related insolvencies.

What can directors of such a company do?

The most important step is to take advice from a licensed insolvency practitioner. All directors are under a statutory duty to seek such professional advice when their company is in financial difficulty. If they do not, they may be personally liable for breach of duty or wrongful trading if they continue to trade in circumstances when they should not be trading.

Business rescue options

There are effective business rescue options available if the company is operating a viable business which has been hit by a one-off financial shock such as the pandemic.

1. Company Voluntary Arrangement

One such option is a company voluntary arrangement which allows the company to put a proposal to creditors for the re-scheduling and/or reduction of existing debt over an extended period of time, sometimes up to 5 years. Creditors will often view such proposals favourably when comparing the outcome with the alternative of liquidation, and only 75% in value of creditors are required to approve the proposal in order to bind 100% of creditors.

2. Pre-Pack Administration

Where the company cannot be rescued but the business can, then a pre-pack administration may be the solution going forward. If a company cannot continue trading due to its debt burden, then the best way to maximise what it has – for the benefit of creditors – is to sell its trading business. The potential buyers prepared to pay the most for the business are often the existing management or owners.

Maximising the value of a business for the benefit of creditors usually requires continuity of trading and so the terms of the sale can be negotiated and agreed prior to the administrator’s appointment, with the sale being completed following administration, literally within minutes. Since April 2021, pre-pack administrations to connected parties have required an independent evaluator’s report approving the deal in advance, as a safeguard to ensure that the sale is in the best interests of creditors given the lack of creditor scrutiny of a process that occurs pre-administration.

2022 will be another tough year for businesses. Directors need to ensure that they seek professional advice from a licensed insolvency practitioner. If the business is viable, then there are very effective options to rescue it. If there is no longer a viable business, the sooner the directors start an insolvency process the better for both themselves and creditors.

If you are concerned about the viability of your business post-pandemic or have any questions relating to the insolvency process, please contact Cory Bebb.