At the time of writing, we were entering the final stages of both the furlough scheme and of various legal restrictions upon creditor action for pandemic-related debt. On 30 September 2021 furlough support will finally expire, and – whilst we learned today that the minimum threshold will be temporarily raised to £10,000 – the availability of winding up petitions will be restored to the mainstream creditor recovery toolkit. For many companies, including those who have been struggling to make ends meet owing to the build-up of significant debts owed to them, this change cannot come soon enough, but even though commercial rent arrears still cannot be pursued in this way until March 2022, these changes will inevitably place many businesses on the cusp of a further period of uncertainty as they adjust to both an increased wage expense and the prospect of deferred debts coming home to roost.

I was given the opportunity recently on behalf of R3’s Southern and Thames Valley committee to comment on the challenges faced by business leaders as a result of these changes, and those comments have been released elsewhere, although of course at the time we did not know that we would also be facing the prospect of significant National Insurance contribution rises with effect from April 2022. At the time, our focus was on encouraging directors to take advantage of furlough support whilst it remained available, but now we must look beyond this and do what we can to help directors arm themselves for a post-furlough business world featuring immediate and near future hikes upon their wage bills, alongside other rising costs and supply chain issues.

The key thing we wish to draw readers’ attention to in this context is that R3 have produced a free guide for company directors which provides an in-depth description of the common signs of financial distress in companies, along with a full range of restructuring and insolvency options available to businesses which need to consider such a route. It is by identifying and addressing signs of business distress that avoidable business failures will be averted, and directors of failing companies best protected from the risk of personal liability for failure to read and act upon those signs. Reading and following the tips in the R3 guide will possibly, therefore, be the single best use of a time over the coming weeks for any director concerned about any of these issues. What follows is a brief selection of key points dealt with in much more detail in the guide.

Prospective challenges

During the last few weeks of the furlough scheme many companies will continue to enjoy the benefit of the Government effectively underwriting, where applicable, a large percentage of their wage bill. However, in much the same way as some directors have already been held to account for bounce back and other loans taken during the pandemic where these have been used inappropriately, directors making use of furlough money are expected to use the remaining time to identify any ongoing financial issues their business may face after Government support is withdrawn, and to explore their options for resolving them.

It is naturally very hard for directors to acknowledge if their company may be struggling, but starting the conversation as early as possible will mean they have more potential solutions open to them, and more time to decide about how the company is to move forward.

The most critical things that company directors need to be aware of are the recognised signs their business may be in distress, and of the need not to ignore these signs if they present themselves.

Common signs of distress

Potential signs of distress that are common among businesses include both very obvious triggers and a number of less common signs, including but by no means limited to the following:

• Cashflow problems (in terms of paying wages or suppliers on time and/or triggering contractual penalties);
• Threats of creditor action, including notice of intention to issue a winding up petition;
• Problematic supply chain disruption;
• Regulatory breaches;
• Protracted involvement in litigation;
• Inability to project surplus net income sufficient to meet regular loan repayments; and
• Deferred rents and/or tax obligations.

Any company experiencing any of these could well be facing financial issues, and its directors will be at risk of personal liabilities in the event of a future insolvency or dispute if they fail to seek and to follow prompt advice from a qualified and regulated source about how to resolve the situation.

Solutions

Solutions to these kinds of problems can often be as simple as refinancing or consolidating the company’s debt, or shutting down part of the business so as to protect cash flow, but what’s really critical is that these options are explored before the issue spirals into something much more serious.

R3 developed their guide to provide company directors with all the information they need to identify the signs of business distress, and so they can understand the options that are open to address it.

Identification and remedy start with the simple recognition that the pandemic has disrupted trading for fully a year and a half, and forced around 1.6m businesses to borrow more than £79bn from the government and, at the peak of the pandemic, furlough nearly nine million staff, so these are far from normal times and it is not objectively reasonable to assume that things will return to a pre-pandemic normality anytime soon. Any predictions in terms of future trading must therefore be based so far as possible on objective evidence, verified by qualified expert input where available, and above all the assumptions made by the directors must be safely recorded for posterity (see our blog on 3 practical legal tips for business management following COVID-19/ Brexit trade disruption).

Clearly there are a large number of directors across the country who are worried about the future and unsure what to do if their business is struggling, and we hope these directors will use the guide to gain a clearer understanding of whether their company is in fact struggling, what they might consider doing to turn things around if it is, and where they can get the help they need to do it.
Following the pointers in the guide and taking bespoke advice from the right people at the right time will hopefully help to keep the vast majority of businesses healthy and profitable for the foreseeable future, whilst at the same time protecting directors from personal risks in a way which allows them to focus on that desired outcome.

Can we help?

Once a company director has ascertained that the business may be struggling, to gain a full understanding of a business’s financial standing usually requires early, critical input from an insolvency practitioner accountant (IP) to assess the overall financial situation and the viability of formal solutions in practice. For the most part, meeting the sort of challenges discussed in the R3 guide will require the services and skills of an IP first and foremost. We have many years’ experience of working with such individuals and we can help to identify the very best IPs for a particular situation. All licensed IPs have undergone rigorous training, but this does not make them all equal, whether in terms of experience, resource, pricing or contacts with major creditors and regulators, for example, any of which variables can make a difference in terms of the range of solutions likely to be viable.

Often the right solution will also require input, alongside the IP, of the company’s existing accountants and/or of a suitably experienced solicitor. IPs and accountants are not legally trained and cannot, for example, advise fully upon such matters as the re-use of company names following insolvency, directors duties, or the ramifications of certain transactions (whether that be debt restructurings, refinancing etc.) in light of insolvency and company legislation, whether certain liabilities or litigation are genuinely avoidable (and if so at what likely cost in terms of legal fees), the risk of exposure to claims under the Insolvency Act, Company Director Disqualification Act and/or Companies Act, options regarding employees and redundancy, to name but a few.
Please do not hesitate to get in touch with Mike Pavitt, Lucy Andrews, or any other member of our Corporate Restructuring & Insolvency team should you wish to discuss any insolvency issue (whether or not raised in this blog) – we would be very pleased to help if we can.