Corporate Structure and Insolvency

There are a number of early signs to look out for in respect of a company's declining financial position, including:

• cash flow problems - these may be short term, however if a company continuously cannot pay its debts on time this is a serious financial issue and could lead to insolvency.
• creditors letters/CCJ's - a creditor may send letters to a company with outstanding debt. Where such debt remains unpaid for 30 days or longer a creditor can apply for a CCJ forcing a company to pay the debt. If a company still cannot pay the debt, a creditor can use a CCJ to take further action such as instructing bailiffs to attend the company premises or depending on the size of the debt they can apply for a winding up petition for compulsory liquidation.
• borrowing issues - where a company is consistently reaching its credit limit or unable to borrow any further funds, a company needs to closely look at the situation.
• high staff turnover - if a company has a high staff turnover, it may indicate that staff feel uncomfortable about the stability of the company or the company may be unable to pay wages consistently.
• declining profits margins - a serious indication that a company may be struggling.
• loss of major contracts - Can lead to financial issues.

1. The Balance Sheet test - Essentially a company needs to review its balance sheets and determine whether their debts outweigh their assets. If the total value of the company's liabilities (whether current or prospective) are greater than the value of the assets, the company could be facing insolvency.
2. The Cash-flow test - This test looks at whether a company is able to pay its debts as they fall due. If a company cannot meet payment dates, it could be deemed insolvent.

Early action is key! Directors have a duty to promote the success of the company and must have regard to the likely consequences of any decision in the long term. They must also exercise reasonable care, skill and diligence when carrying out any functions as a director.

As soon as directors become aware of financial difficulties, they should seek professional advice from a corporate insolvency solicitor, insolvency practitioner or accountant to discuss all the available options. Professionals prefer to be approached at the earliest stage as more solutions may be available to recover the business and avoid insolvency all together.

If an under performing company continues to trade at a loss and no remedial action is taken, it could very quickly progress into what is known as a distressed company. At this point, there are fewer recovery options available and it may be too late to save the business.

If a director knowingly continues to trade and fails to act, they could be found guilty of wrongful trading, fraudulent trading or misfeasance or breach of any fiduciary duty or other duty. The consequences would see the individual directors become personally liable for any outstanding monies and debts of the company.

The government introduced the Corporate Insolvency and Governance Act in June 2020 which amended insolvency and company law to support businesses during the COVID-19 pandemic. It introduced new corporate restructuring tools and temporary measures to alleviate the impact of Covid-19 and to allow businesses some breathing space to seek advice and support.

One of the temporary provisions includes restrictions on statutory demands and winding-up petitions, meaning that creditors cannot present a winding- petition unless they can prove that the financial issues of the business are not as a direct result of Covid-19. These restrictions have been extended until 31st December 2020.

The Act has also relaxed the rules on company meetings and filing requirements, providing companies with greater flexibility and time to hold meetings. Companies who are obliged to hold AGMS will continue to be able to hold these virtually until 30th December 2020, allowing shareholders to review company documents and vote remotely.

Termination clauses remain prohibited by the Act, preventing supplies from ceasing to supply or asking for additional payments while a company is undergoing a rescue process. Companies should note that small supplies are exempt and do not have to supply until 30th March 2021.

The new moratorium procedure has been extended until 30th March 2021, giving companies breathing space to explore rescue plans and restructuring options without creditor action.

Finally, businesses are protected from the threat of eviction until the end of 2020 following an extension to the commercial eviction band.