The ending of the temporary measures introduced by the Corporate Insolvency and Governance Act 2020 is likely to have a huge impact on businesses of all sizes, but particularly SMEs within specific service sectors who are facing further difficulties now because of the economic climate we find ourselves in. For those businesses there is may be a struggle to balance repayments on their own credit facilities (bank loans, finance agreements etc) while ensuring they do not accrue debts owed to them from their own customers.
This article discusses, albeit briefly, some of the issues that such businesses and their owner-managers should think about.
A Brief History
The Corporate Insolvency and Governance Bill 2020 was rushed through the parliamentary process within 5 weeks following its first publication in May 2020. When the Bill obtained Royal Assent on 25 June 2020, thereby becoming the Corporate Insolvency and Governance Act 2020, it was hailed as being the most significant reform of the insolvency framework in the United Kingdom for a generation. The last change of that magnitude being the wide-ranging introduction of administrations under the Enterprise Act 2003.
In part the speed by which the Act was passed was a response to the COVID19 pandemic, as the Act introduced a number of temporary measures to relax actions against companies and directors during a time of national crisis. Over the following 18 or so months, the Act was extended and varied as the country continued to adapt to and deal with the ongoing pandemic.
Those temporary measures included:
- Limiting wrongful trading actions against directors where the company continued to trade during the pandemic despite being insolvent at that time.
- In the first iteration of the Act, a restriction on the use of statutory demands as the basis for filing winding up petitions;
- Creating a new winding up procedure pursuant to which:
- a creditor must first evidence that the company would be insolvent irrespective of the pandemic;
- introducing a non-attendance pre-trial review hearing at which the court would determine whether or not the petition has merit to proceed, and only then allowing the petition to be advertised by further court order; and
- the presentation of a winding up petition would not prevent the company from disposing of assets and making any such transactions void from the date of the winding up order, not the date of the petition being filed.
- Later amendments of the act varied the restrictions noted in point 2 above, allowing the use of statutory demands, but increasing the debt threshold from £750 to £10,000 and requiring the demand to contain a number of prescribed statements.
Some of the temporary measures, for example the limiting of wrongful trading claims against directors, have already ceased to be in effect. On 28 March 2022 it was announced that, from 1 April 2022, all remaining temporary measures introduced by the Act and its various amendments came to an end.
What this means is that we have reverted back to where creditors can serve statutory or other demands for sums over £750 and can follow up an unpaid demand by presenting a winding up petition without needing to consider whether or not COVID19 had an impact on the debtor company’s ability to pay its debts.
It was of course known from the outset that the government’s protective measures would come to an end at some point, and some had anticipated that when they did many companies would suffer from having the crutch propping their business up abruptly taken away.
What likely had not been anticipated was that when the temporary measures did come to an end, the UK would find itself in the middle of a supply-chain crisis, cost of living crisis and soaring inflation and energy prices. This is, however, the proverbial perfect storm that many businesses now find themselves in.
The difference between Winning and Losing
“try to do the right thing at the right time. They may just be little things, but usually they make the difference between winning and losing."
To combat the rapidly rising inflation, the Bank of England will undoubtedly continue to raise the base interest rate, at least in the near future. The shortage of supplies of raw materials is causing increasing delays and this, coupled with the increasing energy costs, is forcing businesses to increase their own sale prices.
It seems inevitable that a time will come when companies will feel the pain of decreasing turnover and increasing baseline costs. It is an unfortunate reality that, when that time comes, cash will be king and the ability to efficiently and expeditiously convert a debtor book into money in the bank will be a key factor distinguishing those companies which succeed and those which do not.
What will be crucial for businesses will be to maintain strong relationships while at the same time properly managing the credit line, whether formal or informal, they offer their clients and customers. Furthermore, should the time ever come, having the foresight to deal effectively with those debtors who do not pay or will not pay. If the need arises, companies also have to know what tools are available for them to utilise in order to take legal action against those who will not pay to recover the sums they are owed. That action may include issuing legal proceedings and/or presenting winding up petitions.
The Optimism Bias
“Optimism - the doctrine or belief that everything is beautiful, including what is ugly.”
There is little point in setting up a business for yourself without having the optimism and self-confidence to believe you can overcome any adversity. For owner-managers of SME businesses in particularly, there is too often a blurring of lines between belief in the individual and the actual running or a corporate entity.
The difficulty is that often that undoubting optimism and unwavering self-confidence can stop owner-managers from seeing that their business is in financial difficulty or worse, that the company is already insolvent according to the statutory definition in the Insolvency Act 1986. This, coupled with a lack of awareness as to the statutory obligations placed on directors, leaves such owner-managers at personal risk.
To very broadly summarise those obligations, the Companies Act 2006 placed on directors a fiduciary duty to act in the best interests of the company. Separately, though there may be some factual overlap, the Insolvency Act 1986 hold directors accountable for any losses suffered by creditors where a company has continued to trade or undertake business transactions while insolvent, ranging from misfeasance to fraudulent trading.
It is expected and entirely understandable that owner-managers will continue to hold out and hope for things to improve, for sales to increase or for suppliers to re-commence deliveries. While doing so, however, it is imperative that those owner-managers also remain aware of what liabilities the company is incurring and the company’s ability to pay those debts as they fall due.
It seems that, too often, directors unwittingly find themselves on the receiving end of actions brought by liquidators in situations where they believed they were acting with good intentions. The inability to separate the corporate entity from themselves is a pitfall for many owner-managers, and in the coming months or years this is something which may become increasingly more prevalent.
Though it is universally hoped that the economy will recover quickly, the road to recovery will be a difficult one.
The ultimate takeaway is that, particularly SME companies and their owner-managers must adapt to the changing environment we find ourselves in and must be quick to take action to protect their business and themselves.
As obtaining loans and credit from banks becomes more and more expensive, ensure that your business is generating and retaining cash will be crucial.
Should the worst case scenario manifest, owner-managers must promptly seek advice and assistance to first see how they might recover their business and second to ensure that they themselves are protected against incurring any personal liability.
Written by : Uday Patel, Partner
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