Thursday September 23, 2021

As the removal of two key COVID support measures looms, Restructuring Advisory Partner, Allan Kelly explores what business leaders should be keeping front of mind.

For many business owners, the COVID-19 pandemic has led to both unpredictability and uncertainty. Although the UK economy has been supported by emergency funding, alongside the moratoria on forfeiture and winding-up petitions, the government is gradually reducing its suite of COVID support measures.

Notably, the government’s furlough scheme will close at the end of September 2021, and restrictions on filing statutory demands and serving winding-up petitions against businesses with unpaid debt will cease with a temporary increase in the debt threshold, and 21-day period to explore repayment proposals.

As such, many firms will have new financial challenges to address in the immediate future. So, amid this ongoing uncertainty, what do business owners need to be doing?

Preparing for the end of furlough

Since the start of the pandemic, more than 12 million employees in the UK have been furloughed. Whilst the government’s Job Retention Scheme has successfully protected employment and incomes over the past 18 months, it comes to an end on 30 September 2021, highlighting the emergence of new challenges for both employers and employees.

Every business is likely to have a different attitude to the end of furlough and what it will mean for their firm, which will be largely dependent on the state of conditions within their organisation and specific sector. A business in the travel and tourism sector will be facing a very different operating environment than one in online retail, for example.

Whatever their circumstance, business owners now need to review their current operating models, and carefully weigh up their ability to support the staff infrastructure they will take back from the end of furlough onwards.

The withdrawal of furlough support means a sizeable and unavoidable cashflow crisis could materialise, so it’s essential that businesses have plans in place to help manage these costs. This is particularly crucial as the payment terms of staff salaries can’t be stretched in the way that other forms of business liabilities can.

If owners don’t think that they will be able to maintain their operations without furlough support, they need to take immediate action to reappraise their business models. It will be particularly important to look at the shape of the business before the pandemic, and then determine what needs to change so that it reflects the state of the market it operates in, and its position to prosper again in the future.

If a business can’t support itself in the short term but can be viable longer term, then it’s inevitable that some difficult decisions will need to be made. If extra cash injections are required, it may be worth considering whether use of some of the remaining government loan schemes, such as the Recovery Loan Scheme (RLS), would be appropriate.

The RLS supports access to finance for businesses of any size as they grow and recover from the disruption of the pandemic – allowing firms to borrow up to £10 million, available on repayment terms of up to six years for term loans and asset finance, or three years for overdraft and invoice finance facilities. Firms should be mindful, however, that the scheme is currently only running until 31 December 2021.

Equally, in the event that redundancies need to be made, ensuring the best possible outcome for staff is paramount. If businesses can’t afford to meet the costs of paying employees statutory redundancy pay, they can apply for support from the government’s Redundancy Payments Service (RPS). This will enable payments to be made directly to employees, but firms should be aware that the money given is not a grant, and will ultimately need to be repaid to the RPS.

For businesses in distress, formal restructuring tools could offer a solution. It might not be the first thing that comes to mind when business owners think about recovery, but restructuring procedures such as moratorium or Company Voluntary Arrangements (CVAs) can offer an effective, and sustainable, way to help businesses emerge from difficulty and chart a path forward.

A moratorium ringfences a business from creditor action and provides a standstill with its creditors, creating valuable cash headroom as it is restructured, refinanced or sold. However, businesses must exit solvently as a going concern or alternatively through a CVA. The moratorium can be in place for up to 12 months with creditor approval.

A CVA, which involves establishing a binding formal agreement with creditors to repay outstanding liabilities, can give a business valuable breathing room to focus on recovery. It will typically operate over three to five years, with regular contributions made to creditors, or alternatively a lump sum payment to creditors, often secured from third party private lenders, is another option.

A CVA must be approved by both at least 75 per cent of voting creditors and more than 50 per cent of the creditors unconnected to the business. Once approved, it will bind all unsecured creditors but will not bind secured or preferential creditors unless they consent.

Winding-up moratorium

The suspension on issuing winding-up petitions against businesses with outstanding debt – introduced as part of the Corporate Insolvency and Governance Act 2020 – is also ceasing at the end of September.

Further temporary concessions – including a 21-day period requiring the creditor to seek a repayment proposal from the debtor before they can issue a petition and an increase in the minimum debt threshold to £10,000 – have been introduced to mitigate the impact on businesses.

But the first consideration for any management team should be to review what sort of debt, and level of debt their business has accumulated.

A viable business should have continued to service its debt throughout the pandemic, but many will have been unable to do so. For firms that still have legacy COVID debt to pay, business owners need to consider whether they can reach an agreement with their creditors including extending debt payment profiles, if they haven’t already done so.

With the end of the winding-up moratorium fast approaching, creditors who want to pursue their contractual debts will already be limbering up, and it’s likely that we’ll see more forcing of debt collection, as well as an increase in petitions being served. It must also be recognised that there’s a cost for creditors to pursue this course of action, however, from their perspective, there’s lost revenue at stake too.

Many business owners are working tirelessly to find a strategy to overcome these challenges, and get back to strength and profitability. However, this won’t always be possible for all businesses. Again, formal restructuring procedures like CVAs could offer an effective way forward. Alternatively, firms might also consider an option such as a restructuring plan – a court-approved agreement, similar to a Scheme of Arrangement, between a company and its creditors that can be used to affect a solvent re-organisation of a company.

The process, which came into effect via the Corporate Insolvency and Governance Act (CIGA) last year, has already proved to be a viable alternative to traditional restructuring processes such as Schemes of Arrangement and CVAs – providing a more flexible, efficient and powerful option to enable companies to restructure their balance sheets and operations.

Implemented effectively, a restructuring plan will see no party is in a worse position than the relevant alternative – often, but not always, an insolvency process. This process can also be used as a ‘one stop shop’, addressing multiple facets of a company’s liabilities and balance sheets. This makes the process more efficient, and ultimately could help deliver a more sustainable result.

Businesses should be mindful that even if they have sizeable legacy COVID debt to manage, proactive and honest communication will be key. Oftentimes, creditors would prefer not to wind-up a customer or trading partner, and could be open to working with a business, and its advisers to find a sustainable solution that avoids crystallising debt.

With pressure points ahead, management teams need to be working now to review how these changes could affect them and their businesses. Prompt action at the sign of any trouble will only serve the firm’s best interests – and those of its stakeholders, creditors and staff.