The coronavirus pandemic has pushed down pressure on the global economy, tipping unstable businesses into the red and forcing the remainder into recovery mode to battle challenging trading conditions and the unstable future which lies ahead. The unprecedented economic backdrop has forced businesses to adapt to a customer base fluctuating in buyer behaviour, changing public health guidance and increasing social distancing measures. If Covid-19 has pushed your business to its inevitable end following an accumulation of pre-Covid-19 debt and long-term cash flow limitations, you will need to seek a formal insolvency measure.
A licensed insolvency practitioner will be able to advise you on the best route available for your business, depending on whether it is solvent or insolvent. The financial health of your business will determine the route that you will take as if there is a possibility of business rescue, there are routes available which can help spur business recovery. There are established insolvency tests which can determine the level of deterioration caused to the business and to gauge the financial position of outstanding creditors.
What’s the insolvency cash flow and balance sheet test for insolvency?
The cash flow test for insolvency measures if the business has enough capital to fulfil financial commitments and maintain the daily running of the business, such as replenishing stock and paying employees. If the business is cash poor and struggles to provide services due to lack of funds, this is a serious barrier to success as it marks the beginning of company deterioration due to debt built-up, restricting the basic functionality of the business.
If the business has significant upcoming payments and these will likely go unfulfilled following the results from the cash flow test, you will need to assess the value of company assets in order to fulfil these costs. The balance sheet test for insolvency will evaluate the value of company assets and liabilities, as if your business debts outweigh the assets of the business, you will be unable to repay debts and therefore likely to be insolvent.
After carrying out both tests for insolvency, if you cannot meet payment demands when they fall due and your business is not asset-rich, a cash injection or alternative finance facility is unlikely to help the business recover. You will need to explore the closure options available to you as a result of Covid-19 trading disruption weathered by businesses on a global scale.
Cost-efficient voluntary closure due to insolvency
If your business is at the finishing line and no longer has the necessary funds to continue trading, top-up products and maintain employee payments following the enforcement of cost-cutting exercises and stricter credit control measures, opting for a Creditors’ Voluntary Liquidation (CVL) may be the next step of your journey. This route consists of voluntary calling for the liquidation of your business after arriving at the realisation that the business has no prospects of recovery. If your business has realisable assets, creditors can recoup funds following the realisation of assets.
A Creditors’ Voluntary Liquidation consists of appointing a licensed insolvency practitioner to navigate the process following an agreement made between company directors. Shareholders and creditors will be notified of your decision to liquidate the business and the insolvency practitioner will compile a report which analyses the health of the business, outstanding debts and the value of assets, also known as a Statement of Affairs. Upon reaching an agreement from 75% of shareholders, the winding up of the company will begin. After the proceeds realised from assets are distributed amongst creditors, complying with the specified order of repayment to creditors, the company can then be struck off the Companies House register. It’s vital that company directors show no form of preferential treatment to creditors during this process as a failure to do so could result in director disqualification.
Forced liquidation due to creditor pressure
The most common type of company liquidation is compulsory liquidation which is as a result of legal action against the business from creditors in an attempt to recover outstanding funds. If you are in serious arrears, creditors can turn to the court for an order to wind up your business, resulting in the liquidation of your business and then dissolution. A voluntary liquidation route should be pursued before reaching this stage as you have greater flexibility over the time frame and by catching the business in the early stages of financial difficulty, you may be able to rescue the business or achieve a better return for creditors.
In order for a winding up petition to be granted, the creditor must be owed £750 and have waited a minimum of 21 days for the debt to be repaid. To kick start the process, an official receiver will be appointed, also known as a liquidator, who will assess the value of company assets and embark on a selling exercise to generate funds to repay the debts of the business. Any remaining funds left in the business will also be earmarked as repayment to creditors.
The company closure route may have been written on the cards for a host of businesses, months before the arrival of the pandemic which forced them into a faster end. Smaller shopfronts hopeful to generate custom from lunchtime trade and office workers, once soaring financially, may have had their custom entirely eradicated as office working transitioned into home working across the world and only essential shops were allowed to trade as the pandemic swept across the country. To protect the position of your business and reputation as a company director, turning to professional support to explore company closure may help limit liabilities and protect your future goals in the industry.
About the Author
Jonathan Munnery is a partner at UK Liquidators, UK’s largest provider of voluntary company liquidation services made up of licensed insolvency practitioners and business restructuring specialists. He regularly advises businesses on the brink of collapse as a result of the effects of the coronavirus pandemic, guiding them through their options available.
