Business help extended however with some subtle changes

Extension of temporary insolvency measures

For those businesses that are experiencing cashflow difficulties brought on by the COVID-19 pandemic, the Government’s decision to extend the easements provided by the Corporate Insolvency & Governance Act 2020 through to the end of the year will be widely welcomed. Though, directors should waste no time in seeking expert support, as there are some important changes to the rules which they must be aware of. The extension of the temporary insolvency measures put in place to protect businesses during the pandemic indicates the difficulties businesses are confronting, as the second wave of the corona virus pandemic looms. The lengthening of the support allows organisations “extra time to weather the storm”, in the words of Business Secretary, Alok Sharma.

The original easements sent out a strong message to UK business managers when introduced in March, emphasising that the normal insolvency rules did not apply and that their main concern should be keeping their business from going under. Though, there has been a significant change in stance from the government by choosing not to extend the relaxation of wrongful trading provisions. It means that directors who should have concluded that there was no reasonable likelihood of evading insolvent liquidation but continue to trade could be liable for any losses incurred after 1st October, if their business goes into liquidation. Should they also be applying for the job retention scheme, they could be at risk of a HMRC investigation.

HMRC regains preferential creditor status

Furthermore, it should be noted that from December, HMRC will regain its status as a preferential creditor, particularly important for directors who have provided personal guarantees to banks or other financial institutions. Resultantly, this could cause the payment of higher sums under personal guarantees if a business went insolvent, as financial institutions’ ability to recover their debts under floating charges is reduced. Consequently, it may be more difficult for companies to secure bank funding, as borrowing costs increase as their recoverable amounts decrease, which will inadvertently have an  impact on a organisations working capital.

Government’s commercial eviction ban has been extended

In addition, the extension to Government’s commercial eviction ban, announced on 16th September, will also help to provide many businesses with breathing space, helping those businesses who are struggling to pay rent. Howbeit, the affects this may have on a landlord need to be addressed, especially in the event that tenants have run up significant rental arrears. Moving forward, closer cooperation between landlords and tenants, and a new approach to rental agreements will be required to find solutions to tenants’ financial problems. For instance, this could include measures such as turnover rent model, where rental payments are based on a business’ turnover, or allow a reduction in space rented to reflect the changing commercial needs.

Calculate your likely future position with three way forecasting

business growth on laptop graphic

An important phrase to remember for those experiencing pandemic-related financial problems is “cash is king”. Three-way forecasting enables directors to calculate their organisation’s likely future financial position and take steps to address any cashflow gaps before it’s too late, making it a crucial decision-making tool. This technique requires combining data for the organisation’s profit and loss, cashflow and balance sheets, allowing a questioning attitude to a number of possible business scenarios. Turnaround measures take a while to implement, so forecasts should be undertaken for at least the next two to three years. Businesses should waste no time in seeking the support of an insolvency specialist if cash projections indicate the lack of a viable financial future for the organisation, as the specialist will be able to suggest the steps needed to transform the company’s financial fate and continue trading.

Overall, the extension of Government’s temporary insolvency measures will have boosted those businesses struggling with the effects of the pandemic. Though, it is important for them to understand these measures won’t be around forever and in order to future-proof their organisations, directors must take a proactive approach to strengthening their cash position. By getting expert advice now and implementing three-way forecasting effectively, businesses can improve their long-term performance and keep insolvency at bay.

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