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COVID-19 related insolvency FAQs

Many businesses run into difficulties from time to time but COVID-19 has led to unprecedented problems for almost all businesses.

Uncertainty is everywhere; not just the unknown extent and duration of the restrictions being applied but also the ever-evolving degree and timing of government assistance to be offered.

The questions and answers below are intended as guidance to business in the principles that should be applied and the range of options that are available to help.

If there are concerns about solvency it is essential that the interests of creditors are looked after as a priority. That means that it would certainly be wrong to continue trading if there is no reasonable prospect of paying the liabilities that are being incurred. If you can’t see how such creditors are going to be paid then trading should cease.

It may be possible to borrow money, and the government has announced material help in the form of guarantees (as well as some grant funding and rates relief for small businesses). It is now clear that personal guarantees will not be required for loans up to £250,000, but bear in mind that any loan will have to be repaid in due course.  Is it reasonable to assume that the business will generate enough cash when things pick up to repay such loans?  Or are the losses being incurred simply too much to be financed?

In normal circumstances, personal liability can result from allowing a company to continue trading beyond the point where you knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation (wrongful trading).  This is a hindsight judgement made in the event that the company fails.  Case law shows that directors are entitled to take reasonable commercial risk and it seems likely that leeway will be allowed for the special uncertainties due to the virus.

Key to a successful defence is to have good financial information and projections and for directors to record (in writing) that their decision to trade on is taken with the interest of creditors in mind, and to evidence the review of that decision regularly.  The Government has announced a temporary suspension of the wrongful trading provisions (until 1 June 2020) but we recommend proper recording of decisions anyway.

Priority must be given to paying for necessary supplies, including staff costs, to keep the business going. Only if there is a surplus can historic creditors be paid, and they ought to be treated equally.

If you are having to stretch creditor terms then communication is important – creditors will understand the underlying difficulty but will need some proposal or at least prospect of payment. And bear in mind that they too are likely to be under pressure.

The Government has announced measures to stop enforcement of creditor claims, including the forfeiture of leases by landlords, but bear in mind that the liabilities will still need to be paid and the moratorium will not last forever.

There is an automatic deferment of VAT falling due between 20 March and 30 June 2020 and also of the second self assessment income tax payment due on 31 July 2020.

In the event that a business is unable to pay its tax liabilities by the due date, it might be possible to enter into a Time to Pay arrangement (TTP) with HMRC provided that they believe these liabilities could be met in the future, whether this be Corporation Tax, PAYE and NI, VAT, Self-Assessment etc.

These measures can result in the deferment of liabilities, providing cashflow relief in these periods of disruption. Be sure to check out our Cashflow and Coronavirus blog and HMRC guidance for more detailed information on this.

If the demand gap or supply constraint is temporary then the temptation is to cease operations, minimise outgoings and wait for better times to arrive.

The Coronavirus Jobs Retention Scheme is an essential tool in reducing staff costs without having to make redundancies.

It may be difficult to cut other costs, or fixed costs such as rent or chattel leasing/hire payments. Reducing these costs will require negotiation and agreement.

If there is no way to fund the creditor pressure (or if you feel that the losses are just unrecoverable) then trading should cease and the company may need to go into a formal insolvency process. Advice from one of our Business Recovery team to review options is essential.

WE’RE HERE TO HELP

Running a business with the uncertainty of how long this will continue is a big challenge. Our specialist team is continuously monitoring the situation and updating our dedicated webpage. Find out the latest news and advice at https://www.pkf-francisclark.co.uk/coronavirus-updates/ or get in touch if you need some business advice.

FEATURING: Lucinda Coleman
Lucinda is a partner in PKF Francis Clark’s Business Recovery team, she is a Chartered Accountant and a Licensed Insolvency Practitioner with the ICAEW (Institute… read more
FEATURING: Stephen Hobson
Stephen is a consultant and a highly experienced Licensed Insolvency Practitioner. He qualified with a large international practice in London working on corporate investigations and… read more
FEATURING: Nicholas Harris
Nick joined Francis Clark as a graduate trainee in 2004 and qualified as a Chartered Accountant in 2007. He has specialised in Business Recovery and… read more
FEATURING: Scott Bebbington
Scott joined Francis Clark Business Recovery as a trainee in 2012 having previously graduated from Cardiff University. He qualified as a Chartered Accountant in 2016.… read more
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