Sailing into dangerous waters

The warnings are getting louder. Many experts are predicting a tsunami of corporate insolvencies triggered by the ending of the government pandemic support.

Nicola Clark, restructuring and insolvency partner at accountants Azets in the North West, paints a worrying picture as the clock ticks down to the end of schemes such as furlough.

She says: We expect the number of formal insolvencies in the region to continue to increase as furlough comes to an end and as the moratorium on winding up petitions is lifted at the end of September.

And she warns: “SMEs may be particularly vulnerable over the next six months.

Insolvency specialist Ian McCulloch, of Preston based Opus, takes a similar view of the situation and the dangerous waters many businesses are sailing towards.

He says: The government has done a tremendous job in preserving businesses right through the pandemic, but there’s no such thing as a free lunch.

Lancashire businesses are no different to those in the rest of the country. In fact they will have suffered more than most because of the never-ending national and regional lockdowns last year.

Speed is of the essence. The cash crisis is here and it’s now

They now face a serious reckoning as support schemes like furlough come to an end at the end of September, HMRC start chasing the money they’re owed and their banks begin asking them to repay their share of the £79bn borrowing binge through bounce back loans and the other schemes.

Ian points out that even businesses that have survived Covid in a reasonably good shape will face significant cash flow pressures.

For the less fortunate, the puzzle is what to do next to sort out their battered balance sheets and bolster their flagging cash resources. There are also legal implications to take into account.

Ian says: Some very tough questions need to be asked. Can debts be negotiated down? Can extra finance be raised? Are there surplus assets to be turned into cash?  

Can they make a profit in the new normal post-pandemic? Can costs be cut any further? Should less profitable products or services be dumped?

Speed is of the essence. The cash crisis is here and it’s now.

One other threat lurks, he adds. Uncontrolled growth in the recovery after a downturn pushes more companies over the financial cliff edge than any other cause.

So businesses must be strong-willed and resist the temptation to expand too quickly, unless they have the finance in place to fund all the extra activity.

Jimmy Fish, insolvency expert at Cowgills, stresses the importance of company directors being aware about ‘Wrongful Trading’ and its implications.

He says: “This is a topic that I am being asked to advise on more and more in recent times, with directors concerned about trading insolvently and the risks they face by doing so.”

He explains: “Directors may become personally liable to contribute to the assets of a company if the company was allowed to continue trading at a time when a director knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation.”

And he adds: “It is also important to note how customers are doing post pandemic and to stay alert, to ensure that credit being offered on services and products is not allowed to spiral and that accounts are chased regularly for payments in order to keep on top of cashflow and manage your own creditors.”

Andrew Ryder, insolvency practitioner at JT Maxwell, says that managing cash flow, the life-blood of any business will be vital in the months ahead.

And he adds that bringing staff back into businesses after the end of furlough and months away from work will bring its own pressures.

Andrew says that in his experience few directors complete a cash flow forecast or have management accounts vital tools they should have at their disposal.

Its having your finger on the pulse, he explains. With them you can identify a certain area of the business that isnt working or is costing quite a lot.

For businesses in trouble, he offers three simple pieces of advice to directors and owners: dont show preference to anyone in terms of making payments; dont sell any of the companys assets for less than they are worth; and dont get the business in any further debt.

He adds: If you follow those guidelines, you will prevent ending up with personal liabilities. Also, seek advice, there are options out there.

Andrew says that there are indications that HMRC is being less aggressive in pursuing unpaid tax from businesses that have been affected by the pandemic.

Company Voluntary Arrangements (CVAs), where businesses agree repayment terms to creditors, may also be a rescue route to take and there are others.

Andrew adds: Going to speak to an insolvency practitioner doesnt mean you have to close your business down; it is important for people to understand that.

Mark Hague, associate partner at law firm Farleys, agrees. He says: “Administration is a recovery process and not one designed to kill a business.

By recognising the early signs and seeking advice, a company has a chance to put an action plan in place to minimise the adverse consequences of the current climate.” 

“The earlier a business acts, the more options they’ll have to continue trading and recover.”

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