Steps to avoid insolvency

As businesses struggle to survive the worst economic downturn in centuries, the Government is doing what it can to minimise the number of insolvencies. In the first two weeks after lockdown the Office of National Statistics reported that 25 per cent of companies temporarily stopped trading and 41 per cent of those still operating reduced staff.

Westminster has introduced a number of rescue measures including the Coronavirus Jobs Retention Scheme (CJRS), the Coronavirus Business Interruption Loan Scheme (CBILS) and, most recently, the 100% government-backed micro loan scheme for small firms. These have been welcomed by businesses, with 140,000 firms applying for the CJRS on its first day.

There have been reports, however, that lenders are being slow to approve the loans under the CBILS. In fact, only 1.4% of 300,000 firms were successful in the first three weeks of the scheme. Cash flow is still proving a problem for businesses – even if they are approved, there is a long time gap before they actually get the money.

Cost-saving measures

In any event, these schemes only represent a cash injection in the short term. Businesses need to be looking for as many cost-saving measures as possible to help themselves.

These might include:

  • Improving their cash forecasting
  • Focusing on cash preservation
  • Taking out whatever costs they can from the business
  • Maximising their cash position over this period

Another option to try and improve liquidity could be to investigate deferring rent payments or switching off bank interest. It’s also important to negotiate with creditors. Most are likely to be  understanding as they will appreciate that everyone is in this together and may consider deferring payments.

Change to wrongful trading

The Government has not just given financial help to businesses but also regulatory help by agreeing to temporarily suspend the wrongful trading rules. Under UK insolvency law, these rules usually make it an offence for a director of a company to continue to trade if they know a business is unable to avoid going into liquidation. By lifting the threat of personal liability during the period of the pandemic, it gives directors confidence that they should be doing all that they can to save their business.

Coming out the other side

Even when the lockdown gets lifted eventually, the economy isn’t going to miraculously recover straightaway. Unfortunately, it’s likely that if a business was already struggling, the state support will have just given it a bit of breathing space. It won’t have solved its problems entirely and insolvency could still be a real risk.

With VAT deferment and the CJRS due to finish in June, there will probably need to be a gradual tapering off of the support. Lord Howard Leigh has suggested that the government should consider helping small and medium businesses further by introducing a temporary PAYE/NI waiver scheme or deferment for a set period of time. A moratorium on the ability of creditors to petition for the winding up of a business has been called for to at least give directors some time to restart their businesses.