corporate recovery

What Happens When a Corporation is Unable to Pay its Debts?

Predominantly due to the impact of the Covid-19 pandemic, Creditors’ Voluntary Liquidations (CVLs) are on the up. In August 2021, there were a total of 1,446 corporate insolvencies across the UK, most of which were CVLs; the fourth month in a row above 1,000 and a return to pre-pandemic levels. What was also evident in the figures from The Insolvency Practice was that many of the companies in debt and entering a CVL, or a Company Voluntary Arrangement (CVA), had outstanding bounce back loans, i.e. loans from the Government to help them through the pandemic. So, if a company or organisation is unable to pay their debts, what options do they have in terms of corporate recovery and insolvency?

What is corporate recovery?

If a company is insolvent, as in not able to pay its debts, liquidation is not always the answer. There are a variety of corporate recovery and business rescue options that may be better for the company.

Time-to-Pay (TTP) – TTP is particularly relevant if most of the debt is owed to the Government’s HMRC. So, if you owe on your VAT, taxes, PAYE payments or bounce back loans and they are threatening legal action, you may be able to agree to pay back the debt over a short period of time. However, if your credit history is not good, it’s unlikely HMRC or your creditors will accept a TTP agreement.
Company Voluntary Arrangement (CVA) – similar to a TTP, is a formal arrangement between the company and its creditors whereby a set time period is agreed to pay back the debt. The time frame on a CVA is often slightly longer than a TTP, some of the unsecured debt can be written with the right circumstances, and it will protect the company from any legal action while the CVA is in place. Examples of recent CVA arrangements include: O’Keefe Construction (Greenwich) Ltd, Poundstretcher and Caffè Nero.
Administration – there are two forms of administration, standard and pre-pack administration. The aim of a standard administration is to rescue a company from its debts and provide a better outcome than liquidation. Pre-pack administration is selling the company to a third party who pays the debt off and the company can continue to trade. It is useful if you have one particular creditor that is aggressive in their legal action and you have a third party waiting in the wings who wants to buy the company. Pre-pack administration avoids staff losing their jobs, directors don’t necessarily lose control and it is not such a public business rescue.
Refinance – the forerunner to administration, a lender may decide to call in the debt in its entirety rather than continue with monthly instalments, usually because they aren’t convinced the business is able to pay back its debts. However, a different lender may think otherwise and refinance the company so they can pay off the existing lender, but you will be paying much higher interest rates.

Corporate insolvency changes

In 2020, the Corporate Insolvency and Governance Act 2020 (CIGA 2020) brought in new insolvency tools, including moratorium and a new restructuring plan. While only a handful of corporate businesses, such as Virgin Atlantic, have used the new moratorium rule, with the courts sanctioning DeepOcean’s restructuring plan, it’s likely that more companies will start to take advantage of these new laws, including SMEs.

A big factor in the increase in corporate CVLs and CVAs is the end to the temporary insolvency measures introduced during the pandemic. Restrictions on winding-up orders and wrongful trading rules being suspended, as well as deferring VAT and other tax obligations (that were implemented during the pandemic) have now been lifted. While these winding-up order restrictions were lifted earlier this year, there are some sectors where restrictions are still in place:

Commercial rent arrears – restrictions on commercial landlords forfeiting leases have been extended to March 2022 and will probably remain until the Government’s rent arbitration scheme becomes legal.
Creditors owed less than £10,000 – the original threshold of £750 was increased to £10,000 during the pandemic and remains in place now to allow smaller businesses time to get back on their feet and rebuild their cash flow. However, this also has an impact on SMEs looking to recover debts that are overdue.
Creditors owed more than £10,000 – while these creditors are able to apply for a winding-up order, unless it’s for commercial rent arrears, they are now obliged to ask for payment proposals from the debtor. This gives them 21 days in which to respond before they can proceed with the winding-up order. R3, the governing body for the insolvency and restructuring professionals, are expecting further rule changes in 2021.

Introduction of Covid-19 rent clauses – in recent CVAs, if businesses have had to close due to Government Covid-19 restrictions, companies are able to introduce a rent clause in a CVA which has resulted in a reduction in rents and demonstrates how flexible a CVA can be in restructuring a company.
Breathing space – in certain situations, companies are now able to apply for ‘breathing space’ from creditors to relieve the pressure of debts. However, this could have a knock-on effect in recovering debts into an estate.
The reinstatement of HMRC to preferential creditor status – how HMRC plays their role as a preferential creditor, particularly when it comes to paying off bounce back loans, deferred VAT and other taxes, as well as recovering insolvency debt, could have a major impact on the number of insolvencies over the coming months. If they are supportive, knowing they will be recovering their debt ahead of floating charges and unsecured creditors, insolvent companies and directors can breathe a sigh of relief. If they are not, there is likely to be a significant increase in the recovery of unpaid taxes and liquidation processes.
Directors’ responsibilities – there are proposals to change a company director’s responsibilities, including making directors personally responsible for their company’s financial statements, ensuring they are accurate. It is also expected the Government will introduce legislation to report any company environmental and social obligations.

If a corporate recovery and insolvency plan is not successful and the company remains insolvent or, indeed, its debts have increased, an insolvency procedure is often the last resort option. However, there is much greater support for businesses of all sizes as the UK starts to recover from the Covid-19 pandemic.

Company insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If your business is struggling with debt, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.