Large swathes of British businesses have been materially affected by the Coronavirus outbreak. Without a doubt, this means that companies have to consider the way in which their business continues and unfortunately, it will mean the end of the journey for some. Regulations in place and also some changes proposed by the government will provide additional protection during this period of unprecedented business pressure. However, some firms will still be weighing up whether to carry on or shut down. What are the options? Below you’ll find a brief rundown of what you can consider.
Should we close down or fight on?
Your suppliers and creditors want you to succeed, in the interests of recovering the money they are owed but also to maintain an ongoing business relationship with you. The ultimate decision facing any business at the point of insolvency is whether to close down or continue trading. If your business has been seriously impacted by COVID-19, but you have every reason to believe it will be successful once life returns to a semblance of normality, then keeping the business open can be a viable path to follow. Given the proposed relaxation of the insolvency laws (detailed below), if you are inclined to trade your way back to solvency, there are two main options available:
Enter into an informal arrangement with your creditors
In the current climate, it is likely that creditors will be more understanding than ever. They know that if your business goes into administration, there is a real risk that they will not see much from the sale of assets. It is recommended that you speak to your suppliers as soon as possible to agree a mutually acceptable plan for repayment. An informal arrangement with creditors is not enforceable in law, so there is a risk that the agreement will not be fully complied with. You should take legal advice.
Enter into a formal Company Voluntary Arrangement (CVA) with your creditors
Unlike an informal arrangement, a Company Voluntary Arrangement (CVA) is a legally enforceable arrangement between your business company and your creditors which defines how the debts you owe will be repaid. Your business will also be allowed to continue trading and have the time needed to find solutions to any systemic business problems. The aim of a CVA is to prevent any legal action being taken against your business during the period of the agreement. However, you should note that even if a CVA is in place and you are adhering to the agreement in all respects, secured creditors such as banks or other asset-based lenders can still push for the administration of your business if your company is struggling.
Relaxation of Insolvency Laws
At the end of March 2020, the government announced their intention to temporarily relax insolvency laws to provide much needed “breathing space” for UK businesses. Under the proposed changes, there will be a cessation of the wrongful trading rules under Section 214 of the Insolvency Act 1986. There are also plans to implement a COVID-19 moratorium for struggling companies allowing breathing space from creditors.
Wrapping up a business
Undoubtedly, COVID-19 will mean the end for some firms. While many will know that given time, they will be able to resume a healthy level of trading. But if your business was struggling before COVID-19, or you believe the pandemic will lead to changes that will render your business model unviable, then administration / winding up may be the way forward. There are important considerations here:
- managing employees through the process and respecting their rights
- dealing with any outstanding debts and liabilities
- how to share remaining assets with stakeholders
- closing down a limited company and appointing an administrator if required
It is critical to ensure that when closing a business, you do not just walk away and hope everything will sort itself out. This route is difficult for any business leader to work through, but a formal closing down process is important. You should seek legal advice if you are uncertain about any aspect of taking this option for your business.
How we can help
Should you wish to discuss your business situation with one of our experts please contact LawBite to arrange your free initial 15-minute consultation.