August 2020

Although there has been a recent stutter with regard to pubs and restaurants, many businesses are taking steps to resume trading activities.  It is the natural commercial instinct of business people to seek a resumption of whatever part of commercial life is their favoured choice.

Regrettably, the same level/type of business as existed 6 months ago may not be around. Further, the  welcome short-term support mechanisms that we have seen such as furlough payments, council grants and bounce-back loans could prove to be insufficient to continue in business as before.  Creditors are beginning to press again.

Although the government has introduced legislation which makes it difficult to liquidate a company in the short term, coupled with the options of the debt moratorium and reconstruction sections of the Corporate Insolvency and Governance Act 2020 which received Royal assent on 26 June 2020, many in business are unsure how to proceed if they wish to preserve all, or part, of the business activity that they hope will earn them a living.

If there is anything to preserve, one must have a viable underlying business which may represent some, or all, of the activity undertaken before lockdown. Such business must be capable of generating a profit and cash surplus because no amount of support will save a business that is dead in the water.

Whilst the new legislation is helpful in terms of the options introduced and breathing space offered whilst a director decides the most appropriate way forward, it is useful to remember that the traditional insolvency procedures of either administration or liquidation also allow a director to restructure the business and pave the way for a continuing economic entity to prosper.

Many directors comment that they wish to retain the existing name/brand because they have spent many years creating it.  Such view is perfectly understandable and, as long as the correct steps are taken, retaining the name/brand is possible.

Of course, if a new business is to rise from the ashes, a detailed trading forecast is required, both profit and loss account and cash flow. If the opportunity is created to trade again, careful and objective thought is required because there is little point in buying a business from the administrator/liquidator if the plan is simply to carry on as before. If it didn’t work last time, why will it work this time ? Thus, we may well see a business seeking to diversify and change its main focus in order to adapt to the marketplace. The director will wish to consider what additional risks any changes create and how these can be addressed : flexibility is likely to be a key factor.

In terms of financing a new business, the plan will require to address how to value the assets (building, vehicles, plant and equipment, debtors, stock etc.) and then how to purchase them because the administrator/liquidator will expect to receive the cash immediately rather than offer easy payment terms. Also, virtually every business requires working capital in order to pay operating costs before cash is generated from sales.

Many directors have found that when the old entity is “dumped”, suppliers are somewhat reluctant to deal with the new entity unless there is some assurance of being paid within normal terms, or even in advance of deliveries until a track record has been established.  Similarly, customers may perceive that they find it more unsettling and risky to deal with the new company and will actively consider the offerings from competitors who may appear more stable.

When organising a transfer of business activity to a new company, employment legislation is a crucial aspect to consider because unless a proper plan is in place, normally implemented by the legal advisor involved with the process, more employment liabilities than were envisaged may transfer to the new company and become a burden that was not anticipated.

Careful thought is required before a company is subject to a formal insolvency procedure in terms of some of the benefits that may be available.  Given the likely challenges facing the local market in the next few months, one can see serious consideration being given to some sort of restructuring framework which allows the directors to continue with a reduced/modified business in order to emerge with a more viable, long-term business.

The Meston Reid & Co insolvency team are already fielding calls and attending meetings as directors begin to realise that life will never be quite the same again.

The views in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen.  They do not purport to represent those of the firm in general.