For most companies the government rescue packages at first blush appear an extremely welcome relief – employees’ jobs are secured, directors are protected from any wrong decisions made in these times of uncertainty and creditors are prohibited from closing them down. While some would suspect this provides fertile ground for fraud, for the vast majority of circumstances it provides some relief to the inevitable struggle all companies and businesses are facing to continue trading.
The government has offered additional schemes for companies facing redundancy and with debt collection difficulties, but for most the main ones are the Coronavirus Business Interruption Loan Scheme (CBILS) offered by British Business Bank, the cessation of winding-up petitions being presented by HMRC, the general closure of the Court system (temporarily, although remote hearings continue), the further enforcement on creditors seeking to institute insolvency proceedings against businesses (including individuals) and companies, and the protection of directors (backdated to the beginning of March 2020) by prohibiting any claims for wrongful trading (should their company subsequently be placed into insolvency in the future).
But it is not all it seems – as the recent post by Tim Francis explains, the ability of a company to be placed in administration (or indeed wind itself up) remains. In fact, administration proceedings are almost always instituted by the company or its directors to enable a rescue of the company and its business. Indeed, employees often accompany the purchase of a business out of administration. Administration, rather than being portrayed as a negative proposal, is therefore likely to be the most appropriate proposal for any company enduring or coming out of economic difficulties – particularly those burdened with the weight of the interim trading cost but otherwise with an effective business model and viable healthy going concern business. It is mostly about timing, and a professional advisor such as an Insolvency Practitioner can provide input into this.
Equally for employees, while furlough may seem a good idea, it is one that is limited in its effectiveness and employees are likely to prefer being transferred to a new business which can (post COVID-19, which will occur) continue to pay them all of their salary (whether they fall within this lower bracket of gross salaries up to £3,125 or not).
With regard to directors themselves, as with all insolvency, they do face personal risks but those same directors keeping going can only serve to exacerbate the risks. Better to mitigate early or, if business continues, ensure decisions are documented and are made on reasonable grounds, preferably following receipt of (and consideration of) professional advice. While wrongful trading penalties are currently limited, this is not the case for future claims of fraudulent trading, breach of a director’s fiduciary duties or any application to set aside a transaction favouring the directors or any creditors. All of these powers remain and are directly relevant to decision-making by directors now. Numerous other types of claim against directors arising from their decision-making will continue to pervade.
The winding-up petitions and bankruptcy petitions will return to the Courts with time, and the current moratorium on struggling businesses and individuals will not go on forever, but now is an ideal time to consider whether you want to wait and see, or be more proactive and act now to deal with these future problems so that once the government restrictions are relaxed you are able to move forward and immediately generate success.
If you require any further guidance on these matters, please do get in touch.