• Let’s talk about insolvencies… Jul 30, 2020
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    Previously I discussed the tough topic of redundancies. As we’ve already ripped off the proverbial plaster, now is a good time as any to discuss another one - insolvencies. It’s bad enough having to let employees go but what if you can’t even afford to keep your business itself going? With reduced or zero trading it is only natural that businesses, despite the “best” efforts of the government, are experiencing severe cash flow difficulties. Whilst the CJRS and SEISS were great while they lasted, with the dialling down of both schemes already in progress, unfortunately it just hasn’t been enough and many businesses will either require restructuring, refinancing or insolvency.

    A company’s solvency is defined using one of two measures - a cash flow test (a business’s ability to pay its debts as and when they are due) or a balance sheet test (whether the value of a business’s assets exceeds its liabilities). The cash flow test is the main issue for many businesses at the moment due to a little thing we call a global pandemic that has crippled the economy and brought the country to its knees.

    So what are your options if you fall into this category? Well, if you are hopeful that your cash flow issues will resolve themselves “once all this is over” you may be able to draw up a restructuring plan and there are a few different rescue and recovery options if this is the case.

    1. Company Administration - the company enters into Administration and is protected while an Administrator draws up a recovery plan. Options as part of this recovery plan could include Pre-Pack Administration, sale of all or part of a business or a Company Voluntary Arrangement (CVA).
    2. CVA - the company enters into a formal insolvency process that leads to restructuring. A legally binding agreement and settlement is reached with creditors but the company remains in control of the company, instead, trading under the supervision of a licensed Insolvency Practitioner while the CVA is in place.
    3. Informal Restructuring - this involves utilising emergency funding or entering into informal arrangements with creditors.
    4. Corporate Insolvency & Governance Bill - this is a new piece of insolvency legislation that is currently being finalised in Parliament that grants further restructuring options. These include a moratorium which would afford a protected period of time in which companies can assess its options and propose a new CVA or restructuring plan. It also provides a provision for a Court to force implementation of a scheme of arrangement on creditors if certain conditions are met. These measures were introduced as a result of COVID-19 and could be a lifesaver for companies in trouble.

    Still awake? Good! Last but not least but always a last resort is liquidation. There are two options: Creditors Voluntary Liquidation or Compulsory Liquidation. As the Court has not been in session for months and there will be a huge backlog of hearings, Compulsory Liquidation will be an even longer process than before.

    The most effective way of liquidating a company during COVID-19 is Voluntary Liquidation. This can be implemented by the shareholders and directors of the company who appoint a liquidator subject to creditors agreements. The liquidator takes control of the company and releases assets, communicates with shareholders and assesses creditors’ claims. Voluntary Liquidation can be implemented quite quickly so would be the easier option in this current climate.

    Let’s be honest though, all options suck. But at least there are options. Only you will know what's best for your company but I guess a small comfort can be taken from the fact that you are not alone. Now, I think we all deserve a stiff drink, don’t you?



    Written by Aoibheann Byrne
    BrightPay Payroll Software
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