How big is the can?
The last 18 months have been truly horrendous for most businesses and as lockdown measures are released, government support for businesses is starting to unwind. We are increasingly asked how directors should now deal with the fall out and the advice is always be proactive not reactive.
The numbers are frightening and most businesses are not back to pre Covid levels.
Bounce back loans issued 48
CBILS loans issued 26
CLBILS loans issued 6
Business rates arrears 3
Commercial rent arrears 3
HMRC arrears Unreleased
The most pressing trigger points are rent and HMRC arrears and we focus upon these and a number of other issues relevant to directors as we hopefully emerge from Covid 19.
Landlord evictions, winding up petitions and statutory demands
On 16 June 2021 the government announced that landlord evictions for arrears of rent will continue to be suspended until 25 March 2022. Restrictions on landlords’ abilities to recover rent arrears through seizure of goods is also extended. The government intends to introduce legislation such that lockdown rent arrears will be ringfenced for businesses impacted by Covid and forced to close during the pandemic. The suggestion is that landlords could be compelled to waive some of their debt, agree to a long term payment plan and/or be compelled to submit to binding arbitration in the absence of such agreement.
However the government also announced that the restriction on statutory demands and winding up petitions will only continue until 30 September 2021. This inconsistency suggests that landlords will, after 30 September 2021, be able to issue a winding up petition for the ringfenced rent unless the government legislates otherwise.
In addition it appears that the ringfence is limited to 6 quarters rent, so tenants who have not paid rent from March 2020 until September 2021, will have to pay rent thereafter in order to retain protection.
Our advice is to seek to engage with landlords now rather than hide behind the protection which may not be as strong as it seems. In addition landlords may be more sympathetic if voluntarily approached rather than when protection has ended.
Kwasi Kwarteng, UK Business Secretary wrote to UK businesses in June 2021 promising that HMRC would take a “cautionary approach to enforcement of their debt”. However Kwarteng added that HMRC enforcement “during this crucial period will be largely driven by a lack of engagement by companies with it, rather than just their inability to pay and that using insolvency to enforce payment will remain a last resort”.
Time will tell how this operates in practice however the indications are that HMRC officers will be instructed to agree to much longer time to pay agreements than pre Covid and engagement with HMRC is crucial, as non engagement will allow them to take enforcement action.
Bounce back loans and CBILS loans
Many government backed loans which were interest and repayment free for the first 12 months are now becoming due for repayment. On 6 February 2021 Rishi Sunak announced details of a Pay As You Grow Scheme (PAYG) in relation to the smaller (up to £50,000) bounce back loans.
In summary, borrowers of bounce back loans are able to;
- Request an extension of their term loan to 10 years from 6 years, at the same fixed interest rate of 2.5%; and
- Reduce their monthly repayments for 6 months by paying interest only. This option is available up to three times during the term of the bounce back loan; and
- Take a repayment holiday for up to 6 months. This option is available once during the term of the bounce back loan.
PAYG does not apply to CBILS loans and any holiday/extension must be agreed between the lender and the Bank. All indications are however that Banks will comply with reasonable requests as the Banks have agreed with the British Business Bank (the guarantor) that enforcement should only be used in exceptional circumstances. If the bank cannot enforce then it seems logical that they should reach an agreement.
In March 2020 the government suspended wrongful trading provisions so that directors could continue to trade their companies without risk of personal liability. This suspension ended 30 September 2020 but was then reintroduced on 25 November 2020 until 30 June 2021. Perhaps surprisingly in view of the other suspensions above, the suspension was ended on 30 June 2021.
In simple terms a director can be found guilty of wrongful trading if he/she knew or ought to have known that there was no reasonable prospect that the company would not go into insolvent liquidation i.e. he/she should have concluded that liquidation was inevitable. If found guilty this can result in the court ordering the director to pay personally to a liquidator and disqualification from being a director for between 3-15 years.
At the commencement of the pandemic the impact of Covid was impossible to predict and the government wanted to avoid a landslide of insolvencies that could have been avoided had the pandemic been short lived. The position now is rather different. There is still considerable uncertainty as to how the pandemic will impact companies going forward, however this is now exacerbated by many companies having significant debts in the form of arrears of rent, HMRC debt and government loans. There will be some companies who have reached the point that regardless of the pandemic impact, the damage is terminal and carrying on trading now risks personal liability.
Again the message is to be proactive as it may be possible to put some safeguards in place (forecasts, board minutes etc) which at least form the basis of a defence.
Pre Packaged Administration
Many commentators are predicting that a significant number of companies, through no fault of management, but laden with rent arrears, HMRC arrears and bank loans, will look to take the business through insolvency via Administration and buy it back. This is a legitimate option and if the government thought otherwise then legislation would have been put in place many years ago to prevent this. In addition when on 1 December 2020, government made debts in relation to VAT and PAYE preferential, they effectively rendered many potential Company Voluntary Arrangements (“CVA’s”) unviable as HMRC debt now must be paid in full before any return can be made to the general body of unsecured creditors including suppliers.
The reality is that pre packaged administration sales preserve business and employment. The process has been highly regulated for many years in that Insolvency Practitioners have to comply with a regulatory guidance SIP 16. SIP 16 stipulates that the Administrator must be able to demonstrate adequate marketing of the business, realistic and independent valuations of assets and where possible consultation with key creditors. On 1 April 2021 the government introduced new measures whereby the connected party purchaser must obtain an independent “Evaluators” report, assessing whether due process has been followed and that the transaction is in creditors’ interests.
In the majority of cases the obvious purchaser of a distressed business is its previous management or shareholders. The government measures are intended to help creditors understand the transaction and process. The reality is that if creditors have suffered loss then they are entitled to feel disgruntled at the least. Our view is that whilst it is another hurdle to overcome, those Insolvency Practitioners who have been complying with SIP 16, will have no issues with it.
How Can We Help?
When the pandemic first broke and lockdown was ordered, we produced a number of eshots urging directors not to panic, take advice from their accountants and solicitors, as the government assistance measures were changing daily. We believe that they should continue to do this, however in many cases the damage has been significant, and directors need to protect their positions, engage with key creditors and consider all options. We offer up to two days, confidential and without obligation, or charge, consultation to consider the issues covered in this eshot.
If we are engaged beyond the two days then we will agree a fee basis. If we are not engaged then there is absolutely no further obligation.
If you would like to discuss any of the above or have any queries, please do contact one of our Directors:
Paul Ellison – 07967471211
Rob Keyes – 07500933022
Gareth Roberts – 07979706392
David Taylor – 07855231103