How COVID-19 trading pressures impacts corporate insolvency levels

Source: World Trade Organization

By Paul Williamson

The coronavirus pandemic has caused huge disruption for businesses in the UK and around the world, with extraordinary trading conditions severely testing even the strongest of companies.

In fact, figures published by market and consumer data provider, Statista, show that in April 2020 almost a quarter of all businesses in the UK paused trading or closed temporarily due to COVID-19.¹

When trade ceases so abruptly it’s extremely challenging for even the most streamlined and agile businesses to carry on, but what are the specific problems that businesses are dealing with due to coronavirus?

 

What problems are businesses experiencing due to COVID-19?

Inability to operate effectively, if at all

Social distancing and the national/local lockdowns have made it impossible for some businesses to trade – particularly those reliant on footfall and the physical presence of their customers.

 

Staff shortages due to ill health/self-isolation

Ill health among employees, and the ensuing self-isolation or quarantine, has led to huge uncertainty – businesses can’t plan effectively due to uncontrollable and unmanageable staff shortages and workforce disruptions.


Reduction in customer demand and decreased revenues

Considerably reduced footfall and a change in customer buying habits have significantly reduced revenues, leading to severe cash shortages for many businesses. Some have also experienced problems securing vital finance, being rejected for the Coronavirus Business Interruption Loan Scheme (CBILS) or the Bounce Back Loan Scheme (BBLS).


Pressure from creditors

With such widespread financial fragility businesses have come under severe pressure from their creditors to pay monies owed, and the ever-present risk of being wound up by a creditor remains.

The virus hasn’t gone away, and with a further surge predicted over the coming months what can businesses learn from the initial wave that was so shocking. Also, how can they introduce new working practices and safeguards to protect themselves in the future?

 

How can businesses overcome Covid-19 trading conditions?

Streamlining

A streamlined business is agile and able to change direction quickly when needed. Streamlining measures could include:

  • Cutting costs – selling non-essential assets and ensuring that all outgoing revenues are reasonable and necessary
  • Using new technology – modernising or updating business software, and making sure staff working from home are doing so securely and efficiently
  • Changing working hours/the working week – staggering shifts or rotas so employees face less risk of contracting the virus
  • Eliminating non-essential tasks and workflows to save time and financial resources


Reporting

It’s essential for business owners and directors to know and understand the figures, including:

  • How much cash is required to survive for the next month/six months/a year
  • Whether there will be any cash shortages in the coming months, and if so, when
  • Whether stock levels can be controlled so that vital cash isn’t tied up in inventory
  • The current profit and loss situation and balance sheet position – vital information that warns of approaching insolvency


Additional funding

Consideration should be given to any government-backed schemes and loans that could support the business and provide valuable additional funding to survive the coming months. Alternative sources of finance, including merchant cash advances and invoice finance, may also be appropriate.


Building resilience

Building resilience involves focused planning, potentially involving new technology, and adapting operations to meet changing customer demands/business needs. This makes the business better able to withstand the financial pressure that’s likely to continue for some time. The viability of existing suppliers should also be explored, with research into potential new suppliers providing valuable reassurance that the business can carry on if a key supplier fails.


Professional insolvency support

Early insolvency advice is crucial as it allows businesses to act quickly and with confidence in the face of adversity. A greater choice of options may be available if action is needed – informal negotiations with creditors, for example, or entering an official insolvency procedure. The UK operates a strong insolvency regime with supportive rescue and restructuring procedures available, including fast track CVA (Company Voluntary Arrangement) – just one route that provides protection from creditors.


What happens when a business has to close due to Covid-19?

If a business has to close due to Covid-19, any assets will be sold off to repay creditors – a process called liquidation. There are two types of insolvent liquidation in the UK:

  • Compulsory liquidation whereby a creditor obtains a winding up order from the court
  • Creditors’ Voluntary Liquidation (CVL), which is initiated by company directors

Creditors’ Voluntary Liquidation is a better option, as UK insolvency law requires directors to prioritise the interests of creditors when the company becomes insolvent. If they wait for a creditor to wind up the company, directors don’t fulfil their statutory duties and could be held personally liable for additional creditor losses.

A CVL also offers eligible directors the chance to claim redundancy pay. So what happens during the liquidation process, and how does a business close down in these circumstances?


Business liquidation and closure

When a business enters liquidation, a licensed insolvency practitioner (IP) is appointed to administer the process. The liquidator deals with company contracts, informs creditors of the business’ financial situation, sells company assets, and distributes the funds to creditors. 

At the end of the process the company is struck off the register at Companies House and no longer exists. Additionally, directors undergo investigations by the liquidator to ensure no wrongdoing has taken place during the time leading up to insolvency.


Planning ahead for a new business trading environment

The business world has been forced into action by Covid-19. Actions that businesses may have been planning to implement in the coming years – working from home, new technology, or general streamlining – have had to be fast-tracked due to the pandemic.

Operating in a new trading environment that nobody could have predicted is certainly challenging, but there’s still time to implement protective measures. With a little support, businesses will be able to trade with more confidence, less risk of closure, and with an eye to the future rather than to the past.

About the Author

Paul Williamson is managing director at Selling My Business, business transfer agents founded over 60 years’ ago, specialising in both the acquisition and sale of UK companies.

 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.