30th April 2020
Business rescue options may be on many company directors’ minds during these unprecedented times.
It is undeniable that the business landscape has been heavily impacted by the 2020 coronavirus pandemic.
Company directors from across the country have been contacting us for advice. We’ve recognised a steeply increasing trend: the difficult reality that, due to coronavirus, previously healthy businesses are now facing the threat of insolvency.
If you are concerned about the current or future viability of your business, there are several key indicator tests to clarify whether your company could be defined as insolvent.
The most useful warning sign to consider in the current economic climate is whether your business is able to pay its debts as they fall due in the near future. This is known as the cash flow test.
Due to the decrease in trade as a result of Covid-19, companies that have otherwise demonstrated a strong, positive history of being able to meet their liabilities on time are now wondering how they will continue to do so.
You may recognise that this particularly applies to your company if:
If you believe your company is facing insolvency at present or in the near future, it’s crucial to act sooner rather than later.
There are a wide range of options available for directors to consider, including:
A CVL or ADM can be a favourable option in some cases. However, these options can have certain disadvantages when used for companies that have only recently become insolvent, in comparison to a CVA. We’ve outlined these disadvantages below.
An ADM is a business rescue option that provides protection from creditor threats and legal action as the Insolvency Practitioner attempts to restructure the company.
However, ADMs can be expensive, and therefore may not be feasibly affordable to a company that is struggling to meet its liabilities.
In addition, an ADM needs to fulfil a statutory ‘purpose’.
CVLs provide an affordable option in which the Insolvency Practitioner manages creditor claims and the orderly winding down of a company.
The specific downside here, in comparison to a CVA, is that entering liquidation could impact on the brand, affect relationships with stakeholders and break existing contracts.
In addition, any elements of the business that could be transferred to another entity by way of a sale agreement would be less likely to survive.
For businesses that have previously been able to stay up to date with liabilities but are affected suddenly by a significant event – like the coronavirus pandemic – the best business rescue option could be a CVA.
A CVA is a formally contracted repayment plan that typically lasts for up to five years, whilst allowing the business to continue trading.
This would enable a business to survive the negative impact of Covid-19, operating in a smaller, more streamlined state.
In this state, debts would be more easily managed and there would be opportunity to review any operational or management issues that contributed to the company’s insolvency.
Further advantages of pursuing a CVA include:
The coronavirus crisis has affected us all, and creditors may be sympathetic to companies that have suddenly become unable to meet their liabilities due to the impact of coronavirus on their trading.
As a result, they may be willing to accept a well-structured CVA debt repayment plan in order to return to a positive company/creditor relationship.
The government has also put business rescue measures in place to aid the increasing number of insolvent businesses, and announced amendments to aspects of insolvency law to provide further support.
Most notably, wrongful trading provisions have been temporarily suspended. This gives directors more time to consider their options around insolvency whilst continuing to run their business, without the threat of personal liability.
If you think your company may be facing insolvency as a result of Covid-19, we’re here to help and advise you.
Please don’t hesitate to contact us using the chat-box at the bottom of the page, by email at firstname.lastname@example.org or by calling us on 0207 099 6086.
We want to help.
Hudson Weir are an established firm of Insolvency Practitioners who specialise in business recovery and corporate financial solutions. Hudson Weir provides industry leading, nationwide services for its clients with the intention of easing financial pressures and providing recovery strategies for struggling businesses.More about us
Hudson Weir Ltd (Company number 09477593) is a company registered in England and Wales.