Businesses of all shapes and sizes have found the last 12 months challenging, with some building up significant debts whilst revenues are yet to return to pre-pandemic levels. Despite the positive signs for the future, many businesses will find themselves under increasing financial pressure over the coming months as they get back on their feet.  So what should business owners and directors be doing?

1. Put the interests of creditors front and centre

A company is insolvent if either (1) it is unable to pay its debts when they fall due or (2) the value of its assets is less than the value of its debts and liabilities.  Whilst that doesn’t automatically mean that the company must stop trading, it does impose additional responsibilities and duties on directors.

Under normal circumstances directors have to act in the interests of the company and its shareholders. But things change when a company is insolvent (or nearing insolvency) – the directors must instead prioritise the interests of creditors.  If they don’t, this can potentially result in claims against the directors personally if the worst was to happen and the company fails.

Directors must therefore make sure they act in the best interests of creditors as a whole at all times. What that means in practice will vary from business to business but whatever decisions are being taken – including who to pay (or not pay), what debts to incur and whether the business should carry on – the directors should ask themselves how each action affects creditors and whether it is in creditors’ interests or not.

The potential risks for directors ramp up even further if the directors conclude (or ought to have concluded) that there is no reasonable prospect of the company avoiding liquidation or administration. At that stage directors run the risk of wrongful trading (though the wrongful trading rules have been temporarily relaxed until the end of June 2021).

For many directors trading a business that is in difficulty will be a new and stressful experience. Ward Hadaway’s insolvency team specialise in helping businesses in these situations, helping directors make sure they comply with their duties, minimise the risks and do right by all creditors.   Contact a member of the team for more information.

2. Crunch the numbers and put together a plan

Understanding the numbers and the cash requirement is key and will help identify areas where savings can be made or financial performance improved. Put together a robust and realistic plan which sets out the company’s short and longer term cash requirements and takes into account any measures the business can take to reduce costs and/or increase cash.

When a business is in distress things often change very quickly so its cruitual to have up to date financial information and for all forecasts/plans to be reviewed and updated regularly.

3. Look at funding options

Having a clear idea of what funding the business needs is the starting point to accessing the necessary funding, whether that’s from existing shareholders, loans or re-financing the company’s assets.  There are lots of potential sources of funding available even for the most financially distressed businesses – speak to your advisors.

4. Record all decision making

All distressed businesses should make sure that regular board and/or management team meetings take place and that records are kept of the decisions taken during this critical time. That can help focus minds on making sure that the interests of creditors are put first. It will also help demonstrate the reason why key decisions were made.

5. Engage with creditors and other stakeholders

Early and honest engagement with all stakeholders in the business (whether that’s lenders, shareholders, creditors, landlords or suppliers) will often help get buy-in to the company’s plan to work through its difficulties.

Creditors are often sympathetic provided they feel they are getting open, honest communication and they are being treated fairly. Suppliers often appreciate that business isn’t always plain sailing and many might be prepared to agree to payment plans for historic debts. However, it’s important that any information that is provided is accurate and plans put forward are achievable. Otherwise the directors risk losing that goodwill and trust will be undermined.

6. Dealing with creditor pressure

Whilst there are some temporary restrictions in place on what legal action creditors can take to recover money, dont ignore threats of winding up petitions or creditors taking legal action to recover debts.

If engaging with creditors does not work there are other steps that can potentially be taken to rescue the business, including formal insolvency procedures like company voluntary arrangements (“CVAs”). Take advice from your lawyer or a licenced practitioner as early as possible. The earlier the business takes advice, the more options are likely to be available.

7. Tighten up credit control procedures

Customers might also find the next few months tough and collecting in money might become more challenging.  Having robust credit control procedures will help to collect debt quicker and easier.

Look at how the business gives credit to its customers – what steps can be taken at the start of each contract to check whether the customer is good for the money? How are credit limits set? When are those credit limits reviewed? What investigations are undertaken into a customer’s financial position and how often? What contractual terms are in place and could those terms be tightened up to put the business in the strongest position to get paid? When accounts are overdue what steps are taken to chase up payments and when?  Under what circumstances should debts be referred to external debt collection lawyers or agents?

8. Dealing with insolvent customers

Unfortunately, some customers may themselves become insolvent. Not only might this increase the risk of the business not getting paid, it is also likely to impact on cashflow going forward.

For suppliers to a business that has gone into a formal insolvency process, there are also restrictions on the ability to terminate that contract. see Supply contracts: the new rules on termination – pro-manchester (pro-manchester.co.uk) for more information.

9. Think about how directors get paid

In many owner-managed businesses, directors are not paid a significant salary but instead are paid mainly by way of dividends – directors pay themselves a set amount each month with a dividend being formally declared at the end of the financial year out of the profits the business has generated.

During the pandemic lots of businesses have continued to pay directors in the same way notwithstanding that the business is no longer making a profit. This could mean that the company is simply not able to declare a dividend at the of the year. This in turn risks leaving the director having to re-pay the money that’s been paid to them, especially if the company later goes into liquidation or administration.

If you are normally paid by way of dividends but are concerned that the business will not make a profit, speak to your accountant or other financial advisor.

10. Get early advice

Insolvency professionals are not just there to sell or shut down a business. They also help businesses to access funding, engage with creditors, understand the true cash requirement, restructure the business and generally help get the business in the best possible position to weather the storm without going into any sort of insolvency process.

The earlier a business engages with a licenced insolvency practitioner or a specialist insolvency lawyer, the more options the business will have and the more likely it is that the company will survive.  It might sound dramatic, but getting early advice can often be the difference between a business surviving or ultimately being forced to close.