ARE YOU PREPARED FOR ‘NORMAL’ ?

Have you heard the phrase, “You cannot change the past, but you may influence the future?  All too often we blame what has happened rather just accept that it has happened, and we need to address matters going forward.

 

The past 14 months, or so have been arguably the most challenging any of us have experienced but June brings forward two very important dates:

  • Assuming the Government road map stays on course, the 21st is expected to see the end of restrictions and a return to normal life.
  • It is widely believed the (thrice) extended deadline on various interim restrictions and amendments invoked under the Corporate Insolvency & Governance Act (“CIGA”) will end on 30 June.  These include a limitation on serving statutory demands, presenting winding up petitions and landlords taking recovery action for rental arrears.

 

In addition to the CIGA provisions, many businesses will now be receiving notification that repayments of the “Bounce Back” loans are falling due, while the employment furlough scheme is set to end in the autumn.

All the above events will serve to impact on company cash flow, while many will face recovery action from those debtors, frustrated they could not take enforcement action during the CIGA restriction period.  This includes HM Revenue & Customs where enforcement action has been limited to tax evasion and other limited taxation matters.  It is little wonder the Government have extended the restriction period.

Many will be aware of the phrase, “If you fail to plan then plan to fail.”  Unfortunately, all too often, people are great at what they do as a profession, but the accounting/bookkeeping side is seen as a necessary evil.  That may well be the view but if you had a flat tyre, would you carry on driving or stop and do that necessary evil of changing the wheel?

The prediction is UK will endure a short, but sharp economic recession.  As with previous economic challenges, those prepared are generally the ones who survive, so how do you promote the chances of you being one of those survivors?  Here are a few points that I see when assisting companies in financial difficulties:

 

  1. Put together a cash flow forecast (ask your accountant to help if preferred).  When you have this, check actual trading results with the forecast, at least on a monthly basis in order to compare projections with the actual results.

 

  1. Credit control.  Remembering cash is king and a good customer is a paying customer, and your customers are likely to be facing similar post COVID issues as you.  Unpaid debts do not pay the wages!

 

  1. With credit control comes setting and keeping to credit limits.  If you set a credit limit of (say) £5,000 for a customer and an order comes in that exceeds that limit, be bold enough to inform them you cannot entertain that latest order until some of the older invoices are paid.  Yes, some may grumble but your recovery time will improve.

 

  1. Where appropriate, consider negotiating longer debt repayment terms with creditors.  The Government anticipate there should be a lot of forbearance demonstrated by creditors (including HM Revenue & Customs) as, generally speaking and within reason, they would rather recover their debt than find they are on a list of creditors of an insolvency.

 

  1. Avoid the temptation of “Corrective trading.”  What I mean is, for example, do not think hiking your prices will help you recover sales income lost during the COVID restrictions.  While reasonable increases maybe acceptable, pushing that barrier too high will inevitably lose you custom.

 

  1. If in any doubt, seek independent and professional advice, whether that is from your accountant, solicitor, or an insolvency practitioner.  These advisors are there to assist you and steer you in the right direction so use them and use them at an early stage.

 

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

How are you paid?

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As the heading asks, how are you paid?  Is it a fixed salary, flexible hourly rate or on target earnings, or a combination of these?

In just over 32 years working in the insolvency profession I have been confronted with a wide variety of challenges.  However, the single most challenging task is when informing people, they are being made redundant.  It is my own fear, and I will never get used to being that messenger, even if those unfortunate employees being made redundant is for the greater good of saving a business.

When a company enters into a formal insolvency procedure, in most cases employees are entitled to make a claim for their entitlements against the Redundancy Payments Service (“RPS”).  The one regular surprise (it would appear) is that employee claimants includes directors provided they are able to demonstrate they were also employees at the time.

Generally speaking, the entitlements are wage arrears, accrued/unpaid holiday, redundancy and payment in lieu of notice.  In most cases, these claims are assessed quite easily.  You enter your fixed pay details and what you are owed on the online application.  However, what if you are on flexible hours or your income fluctuates due to commission earnings, so you are unable to insert a definitive earning figure?  This has been an issue for as long as I can remember, and “Best guess” tended to be the answer.  A recent announcement has been made by RPS that should partially address this issue.

With effect from 12 April 2021 employees with variable pay are being asked to calculate their entitlements based upon their 52-week average rate of pay.  I say, “Partially” because no computer system can fully address the large divergence in vocations and some employees could actually lose out.  For example, if you were paid commissions based upon holiday bookings, it is fair to assume earnings have been lower than normal over the past 52 weeks due to the pandemic restrictions.  Conversely, an estate agent may have seen an increase in their earnings due to the suspension of stamp duty enhancing property sales.  The question is, will RPS make an exceptional allowance for the impact of COVID?  I would suggest unlikely.

Should predictions be correct once the Government support programmes end, corporate insolvencies will increase and no doubt, the media will make plenty of noise over the scale of redundancies inherit with corporate failure and restructuring.  This prediction will place RPS under considerable pressure and payment target times will be challenged as a result, exposing those made redundant to a difficult time while they await entitlements.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Are we heading for an economic cliff?

How prepared are you for when the COVID-related financial support and other interim measures fall away? 

With the impact of COVID the Government laid down, what was to become the Corporate Insolvency & Governance Act 2020 (“CIGA”) which became law in June 2020 and had retrospective effect to March 2020.  CIGA was seen as a balancing act between the detrimental impact the severe restrictions would have for trading on one hand against shielding business from depleted cash flow on the other.

In January the House of Lords debated over the continued restrictions on creditor enforcement imposed by CIGA.  These restrictions were intended to expire on 30 September but were extended to 31 December and subsequently 31 March 2021.  In general, the restrictions prevented the service of statutory demands/winding up petitions, landlord enforcement and suspended wrongful trading provisions.  As a result of these restrictions, the latest data suggests an unprecedented level of debt has accrued, including over £4.5 billion in rent arrears.

Furthermore, there is an estimated £70 billion of Government-backed lending, together with deferred tax liabilities, which is most likely going to make HM Revenue & Customs (“HMRC”) a major creditor in most insolvencies, resulting in them having significant influence on the destiny of businesses.  This influence is made all the greater following the upgrading of HMRC to secondary preferential status when formal insolvency is required.

So, what is the good news?

Well, the Government have announced an easing of bounce back loan repayments in an effort to ease cash flow demands.  In addition, recognising the resulting position of HMRC and the detrimental effect COVID has caused generally, the House of Lords have stressed HMRC need to be co-operative and engaging with a supportive approach on proposed COVID-affected corporate restructuring.  Clearly, time will tell on this recommendation and I would say this commercial understanding needs to be wider by including landlords and credit controllers who are all seeking recoveries.

I asked in the title whether we are heading towards an economic cliff.  Personally, I would suggest “Normal” (whatever that is) will not occur over night.  So, rather than a cliff as COVID restrictions ease off, maybe the economy will experience a gradual slope.

Whatever the outcome businesses need to be pro-active.  Review your cash flow and look at ways of reducing overheads, particularly while your turnover gradually starts to return to pre-COVID levels.  You should engage with your creditors and for those who are owed money, a commercial understanding is going to be the order of the day.  If all fails, the advice has to be to seek early advice.  It is no coincidence those who do seek early advice find they have more options available then those who leave it until the last minute.  As a Scout will say, “Be prepared.”

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

The Supreme Court has unanimously dismissed the Insurers’ appeals and allowed all four of the FCA’s appeals

“STOP PRESS”

The Supreme Court has unanimously dismissed the Insurers’ appeals and allowed all four of the FCA’s appeals, which is positive news to policyholders across the country that have suffered business interruption losses as a result of the COVID-19 pandemic.

At first instance the FCA had been successful on many of the issues and now the Supreme Court has found substantially in favour of the FCA on the issues appealed.

The Supreme Court are currently delivering their verdict on this important issue and we will provide further updates as it come through

Any questions please call Gary Pettit on 01604 212150

COMPANY VOLUNTARY ARRANGEMENTS

The Association of Business Recovery Professionals (R3) which is the trade association for the United Kingdom’s insolvency profession, has launched a standard form of proposal (Standard Form) for company voluntary arrangements (CVAs) in light of the COVID-19 pandemic and the subsequent negative economic implications on businesses, especially small and medium-sized enterprises (SMEs). This has been prepared after consultation with insolvency professionals.

BACKGROUND

A CVA is a statutory agreement between a company and its creditors. It allows the company to come to an arrangement with its creditors over payment of its debts or to pay only a proportion of the debt it owes, while continuing to trade. A company can only arrange a CVA through an insolvency practitioner and is required to show that the company is still viable as a going concern. The CVA must be approved by 75 percent (by debt value) of the creditors who vote. CVAs are legally binding on all unsecured creditors and will typically last from one to five years (although there is no legal limit). Once the CVA has been entered into, the company will need to make the scheduled payments outlined in the CVA.

KEY FEATURES OF THE STANDARD FORM

Key features of the Standard Form include:

• A delayed period before payment of 100 percent of the company’s debts (which R3 suggests should be six months). The duration of the delayed period will predominantly depend on the specific circumstances and creditors of the company, and the time periods suggested in the Standard Form should be viewed as guidelines only.
• An explicit statement that the company is experiencing financial distress due to COVID-19 and for which the company will have to provide supporting details of its circumstances.
• New trading costs incurred during the CVA are to be paid out of new trading income and support from the UK government, where available.
• An additional introductory period of a maximum of three months, designed for companies that are still unable to restart their operations following the initial UK lockdown that began on 16 March 2020.
• A moratorium against creditors enforcing their historic pre-CVA debts during the “introductory period” and the “breathing space period” of the CVA. The Standard Form also includes mechanisms to extend these periods.
• During the CVA, a number of restrictions will apply to the company’s operations, including declaring dividends, increasing directors’ salaries and borrowing or selling the company’s business or assets (save in the ordinary course of business) without the consent of the CVA supervisor (the supervisor) or creditors.
• The ability to suspend payments if the company is located in an area that is currently under a local lockdown (such as businesses forced to close if they are in Tier 3 area).
• The ability to seek further decisions if more significant changes become necessary due to COVID-19.
The main advantage of the Standard Form is the moratorium placed on creditors, which gives the company some breathing space before its creditors can enforce their debts against it. The Standard Form can also be used in conjunction with the new moratorium for businesses introduced by the Corporate Insolvency and Governance Act 2020.
It is important to note that the Standard Form is not “one size fits all.” The Standard Form is also not intended to replace professional advice. Rather, it is intended to provide a foundation, which will save time and costs and make CVAs more accessible for SMEs.

CONCLUSION

Although CVAs are a bespoke process, the Standard Form will undoubtedly aid SMEs considering the CVA process. With the number of company insolvencies set to increase in the United Kingdom over the next few months, it is likely the Standard Form will be a useful tool for SMEs to set the foundation for further negotiations with creditors.
That being said, it should be noted HMRC will fall into the definition of “secondary preferential creditors” from 1 December 2020 under the Finance Act 2020. If a company owes a large debt to HMRC, then any proposed CVA will most likely fail. Whether this leads to a decrease in CVAs after 1 December 2020, or if the UK government will intervene in light of COVID-19, remains to be seen.

Should you have an insolvency-related issue then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Lockdown 2 – Open for Business and Support

The news none of us wished to hear was announced with the UK being placed under lockdown until 2 December 2020.  This could not be any worse for many businesses who are believing this maybe the final straw.

At PBC we recognise businesses need access to advice and assistance without any delay.  Accordingly, the PBC Team continue to be available, while also recognising the need to comply with the lockdown provisions.

There are some key dates advisors should be aware of when assisting your clients.  These include:

  • Crown preferential status returns on 1 December.  This will relate to all unpaid tax liabilities on any formal insolvency procedure that comes into effect on or after 1 December and could impair any effort of restructuring a business.
  • Under reforms to The Corporate Insolvency & Governance Act 2020 two interim prohibitions were extended to 31 December.  These are:
  • Serving of statutory demands or presentation of winding up petitions; and
  • A landlord of commercial property may not take enforcement action against a tenant for amounts due that fall within the COVID interim period.

 

A more concerning point of note is the freezing of the wrongful trading period was not extended beyond 30 October.  Accordingly, directors and business owners alike are now exposed to personal liability or (where an individual is made bankrupt) a bankruptcy restrictions order should they continue to increase liabilities with no reasonable prospect of avoiding insolvent liquidation or bankruptcy.  The inability to trade (as a result of lockdown) does not stop liabilities from continuing to accrue so clients need to assess the financial position of their business and take early advice

What superpower would you have if you could?

What superpower would you have if you could?  Invisibility? Being able to fly? Teleportation?  Or how about being able to re-write the law to suit yourself and ensure you are always on the right side?  That’s exactly what the government has done with two measures in the Finance Act 2020.

 

The first is the position where HM Revenue & Customs rank for dividend purposes.  For insolvencies commencing after 1 December 2020, HMRC shall rank as a secondary preferential creditor for the majority of taxes owed by the insolvent party where that party has acted as a collector of taxes.  This includes PAYE, VAT, CIS and employee’s NI contributions (but not any penalties associated with those debts).  “Secondary preferential” means their preferential status ranks after existing preferential claims (generally employee claims for wages and accrued holiday pay) but in priority to the holder of floating charge security.  HMRC will remain an unsecured creditor for other taxes including corporation tax and employer’s NI contributions.  To summarise, HMRC have therefore jumped to pretty much the top of the priority order in one fell swoop.

 

As a direct result of this, The Association of Business Recovery Professionals estimate that future new lending by banks will be £1 billion less, making recovery and turnaround harder.  To make things worse, the ability to use a formal insolvency vehicle (such as a company voluntary arrangement) may no longer be a viable option as.  the unpaid taxes rank ahead of the general body of creditors, reducing the amount available to unsecured creditors.  Furthermore, it is likely there will be a significant HMRC debt as generally HMRC are the first creditor businesses and individuals stop paying – indeed this is one of the Government’s main reasons for introducing the measure.

 

The second new measure contained within the new law is where HMRC can issue personal liability notices against company directors following tax avoidance and evasion penalties and repeated insolvencies.

 

There are various conditions which must be met before HMRC can issue personal liability notices, but all involve scenarios where the company is insolvent (or likely to be).  In the tax avoidance and evasion cases, the directors can be held liable for all of the tax avoided (and any penalties as a result).  However, in the circumstances following repeated insolvencies the directors can be held liable for debts of the failed companies as well as for any future tax debt of a new company.

 

Before you come over all Lance Corporal Jones (Don’t Panic!) this legislation is aimed at those who act in a deliberate manner of tax avoidance/evasion.  It is not aimed at those who have missed the payment deadline for this month’s PAYE (provided you do still pay that is) or your overall circumstances demonstrate, as a director, you have acted honestly and fairly to creditors as a whole.

 

Having said that, the key message that should be derived from this legislation is if you feel there is an increasing difficulty in managing the company tax affairs, or liabilities as a whole, then seek early advice.  Creditors, including HMRC, are generally understanding where they learn of a possible issue at an early stage rather than wait until the need for enforcement procedures commences.  In addition, the earlier advice is sought the more options there are available.

 

Anyone with an insolvency related issue can contact PBC on 01604 212150.  Our initial consultations are always free, confidential, impartial and no obligation.

Jamie Cochrane