None of which are going to make the business of just doing business any easier.
With less than 12 weeks to go until 2022 is upon us, this might be the most critical trading period ever for some companies.
It might very well be make or break for some businesses. If they don’t have a bumper Autumn and Christmas trading period then the new year might start with them looking at closing their business down for good and dealing with their outstanding debts and creditors.
This also includes bounce back loans that might have been taken out to support the business during the height of the pandemic and lockdown but have now come due and in many cases are overdue.
So we’ll answer some of the more frequent questions we’ve been getting from directors looking to restructure or close their businesses but are reluctant to proceed because of their bounce back loan debt.
Will directors be personally liable for repaying bounce back loans in liquidation?
Because the bounce back loan was designed to have inherent flexibility and be potentially used in several different but legitimate ways by businesses, it was not designed for a single purpose or use.
Primarily this was to provide an economic benefit to the business during the pandemic which could include replenishing stock, paying staff wages (separate from staff that have been on furlough), buying new machinery or bolstering its cash flow position either through paying down debt or building their savings.
Forthcoming law changes included in The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, while specifically being aimed at directors that have tried to dodge their legal responsibilities, might confuse and scare those business owners that have been doing their jobs and now think they might be held responsible for outcomes outside of their control.
The new bill will let the Insolvency Service specifically target and pursue those directors who acted either unethically or illegally.
The main measure sees the Insolvency Service given retrospective powers to investigate the directors of closed and struck off companies and how they acted in the days, weeks and months before their dissolution.
Any director or business owner that can demonstrate how the money was spent on legitimate company activity will have little to worry about from the Insolvency Service.
If the money was used to fund personal purchases or was given to family members for example then they could very well find themselves being made personally liable for the outstanding amount if the business can’t repay it’s bounce back loan arrears.
Do I have to liquidate my business if I can’t pay back the loan straight away?
If a business could have a viable future but can’t meet all its obligations at once including bounce back loans this doesn’t automatically mean that the company has to go into liquidation.
If HMRC are one of the creditors then a Time to Pay (TTP) arrangement can be negotiated.
This is a formal payment plan usually spanning 12 months which is at an affordable level for the company to make and keep up.
Of course depending on the size and types of the debts and creditors a more formal insolvency process like an administration or Company Voluntary Arrangement (CVA) might be more appropriate
Is liquidation possible with a bounce back loan?
Yes!
A business with an outstanding bounce back loan that it has no realistic chance of repaying can still be closed down or liquidated but only if it follows a certain procedure.
If the business becomes insolvent then the outstanding balance will be included in the process alongside any other unsecured debt and treated the same way.
A Creditors Voluntary Liquidation or CVL will usually be the method the licensed insolvency practitioner will use to progress closing down the company.
They have several legal tasks to fulfill while they complete their duties including compiling a report on directors actions leading up to the insolvency and identifying which creditors are owed what amount and how much any existing assets can be realised for to go towards paying off these debts.
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Directors will not personally have to repay any of these company debts unless they have entered into personal guarantees to obtain them or if the Insolvency Service subsequently discover cause for further punishment based on their investigations.
The next few months might raise more questions than answers for a lot of business owners and directors struggling to keep their firms on an even keel.
We’d like to think that we can help them find the answers they’re looking for no matter what conundrums they have to cut through.
Our free initial consultation is the starting point for them to work through their specific and unique situations with one of our team of experienced, expert advisors.
We can then work together to come up with a comprehensive package of options and solutions that can begin to be implemented straight away to bring about the necessary changes needed.
Get in touch with us today and we’ll get busy making sure that tomorrow will provide some answers you’ll like.
This is the highest individual monthly total since January 2019 and the third consecutive month that over 1,000 have been recorded.
So why are so many businesses with outstanding bounce back loans and other debts choosing a CVL to reach an arrangement with their creditors and close down?
There are several reasons, protections and advantages a CVL will give a director or business owner of a closing business.
Should you pay to liquidate your company? Yes and here’s why...
A CVL follows proper procedures and has protections
An essential and unavoidable part of the voluntary liquidation process is an investigation into the directors conduct.
The insolvency practitioner overseeing the process has to provide a report to the Insolvency Service summarising the activities of the directors in the weeks and months leading up to the insolvency.
Directors who disregarded their legal duties or acted dishonestly or fraudulently will have to answer for their actions and could face punishment including fines or being disqualified from acting as a director for up to five year.
In a CVL, this is a collaborative process with the practitioner who will ask pertinent questions but will also look for explanations and evidence to support those decisions taken for the benefit of the business at the time.
They won’t look to trip up or catch out - they will help the directors provide any necessary evidence to support their records and statements.
The forthcoming Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will give the Insolvency Service additional and retrospective powers to investigate the conduct of directors of improperly dissolved businesses in the past few years.
If they find any evidence of malfeasance then they will be able to issue the usual range of punishments but could also make those same directors personally liable for any unpaid debts.
This does not apply to directors or owners who close their business through a CVL.
A CVL is cost effective
A creditors voluntary liquidation can range from between £2,500 and £7,000 but should be considered as an investment rather than a cost.
As the process has to be completed by a licensed insolvency practitioner, the fee is unavoidable but you are also paying for the advice, support, knowledge and guidance that comes from using an experienced and dedicated professional with years in the industry.
They will guide you through every step of the process, will always be available to answer any questions you might have and can also highlight the main areas you could want to focus on such as whether you would want to reuse the company name at a later date or the most efficient way to purchase the assets of the business.
If there is any aspect of the process that they can’t dedicate themselves to - such as reclaiming redundancy pay for directors - then they can recommend appropriate partners that could help.
A CVL is efficient
The creditors voluntary liquidation is a streamlined, tried and trusted procedure that can be completed in as little as two working weeks from the initial meeting to business closure.
All of the essential meetings can be conducted remotely including the creditors meetings to reduce travelling time and expense and while the majority of required documentation can be securely uploaded, if anything has to be physically sent, the practitioner will provide a detailed list of requirements in advance to give you time to find the appropriate evidence.
After a free, initial consultation, the practitioner will provide a review of your situation and recommend your available options. If you decide to proceed with a CVL then the practitioner will convene the necessary creditors and shareholders meetings once officially instructed by you to act.
Once these meetings are satisfactorily concluded then the business can be legally placed into liquidation and the practitioner begins realising any assets and completing any outstanding issues.
A CVL is conclusive
A creditors voluntary liquidation will also provide solutions to many outstanding problems and issues hanging over business owners or directors of a company facing hard times.
These include finding solutions for unpaid bounce back loans, outstanding personal guarantees, directors loan accounts, leases, contracts, VAT arrears, overdue tax, rent and owed business rates.
As more signs of normality and pre-pandemic behaviour return for consumers, many businesses are still finding themselves having to deal with the consequences and effects of 18 months of disrupted trading.
And while the efforts have been nothing short of heroic, some will find that the combined circumstances will be just too much to overcome and otherwise viable businesses will have to look at alternative measures to survive in the short term.
But even this might not be enough to give the business a chance of future profitability and closure will be the only real option for them - although this will free them to pursue new ventures and opportunities in 2022 and beyond.
A creditors voluntary liquidation is the most complete solution to close down a company with outstanding debts but it might not be the only way forward.
Once a business owner or director has their free initial consultation with one of experienced advisors, they will better understand the range of options available to them, often more than they initially believed they had.
But they have to act quickly - the longer they wait, the less options they will have and the less favourable the conditions to act under.
After an unexpected decline in the number of company insolvencies in the UK in July, the August total rose to levels not seen since before the pandemic according to the latest official monthly company insolvency statistics released by The Insolvency Service.
For England and Wales alone, the total number of corporate insolvencies for August 2021 was 1,348 - this was up 251 from the 1,097 recorded in July and is 71% higher than the 788 insolvencies recorded in August a year ago.
The total is also broadly similar to the pre-pandemic total of 1,366 from August 2019 and represents the fourth consecutive month both of insolvencies numbering over 1000 and being higher than the same month a year previously.
Of these 1,348 company insolvencies, the vast majority were Creditors Voluntary Liquidations (CVLs) making up 1,256 of the total amount.
Additionally, there were 35 compulsory liquidations; 55 administrations; 2 company voluntary arrangements (CVAs) and zero receivership appointments.
Breaking these down further we see:
There were 89 company insolvencies in Scotland last month, up from 72 in July. This was also nearly double the number from a year ago and was 13% higher than in August 2019.
This comprised 11 compulsory liquidations, 76 creditor voluntary liquidations and two administrations. There were no CVAs or receivership appointments recorded.
From a historical perspective, compulsory liquidations have been the most common type of insolvency recorded in Scotland but since April 2020 there have been more than twice as many CVLs as compulsory liquidations. This has now been the situation for 15 out of the previous 16 months.
In Northern Ireland there were 9 company insolvencies registered which although five less than in July it was more than double the number from a year ago although 59% lower than August 2019.
This was made up of eight CVLs and one compulsory liquidation.
The overall total of UK company insolvencies for August 2021 is 1,446, which is up 266 from last month.
Colin Haig, President of R3, the insolvency and restructuring trade body said: “The insolvency figures published today highlight how much tougher the climate is for businesses and individuals than this time last year, and the toll the pandemic has taken on business and personal finances over the last 12 months.
“The increase in corporate insolvencies was driven by a rise in Creditors’ Voluntary Liquidations (CVLs).
“Numbers for this process were 115% higher than this time last year, and 30% higher than in 2019, which suggests that despite the opening up of the economy, there are a number of company directors who are opting to close their businesses after a year and a half of trading in a pandemic.
“This comes despite the fact that August was one of the better months for businesses since the start of the pandemic. The lifting of the final restrictions and continued impact of the vaccine rollout means that more people are working, shopping and spending and that looks set to continue as we enter the autumn.
“However, with the furlough scheme closing at the end of this month, company directors need to be aware of the signs of business distress and seek advice if any of them appear.
“If a firm is having problems paying rent, staff or suppliers, has issues with cash flow, or its directors are concerned about its future, now is the time to seek advice from a qualified professional, rather than waiting until the problem has become worse.”
The numbers couldn’t be any clearer.
For the fourth month in a row, company insolvencies are higher than they were a year ago and now are nearly back to where they were before the pandemic began.
This is before the furlough scheme finally winds up at the end of September and winding up petitions can begin for businesses that owe creditors over £10,000 - under this amount continues to be suspended until the end of March 2022.
As HMRC begins to increase their clawback of outstanding debts including overdue bounce back loans and VAT arrears, the next few months look increasingly tough for businesses already struggling with their finances.
If there’s a time to look for help and get expert advice on what options are available then it’s now.
Any business owner or director taking advantage of our free initial consultation might be surprised at how much room to maneuver they actually have, but until they get in touch and let us know their situation - they won’t know for sure.
What we know for sure is that the longer businesses leave it, the less opportunity they will have to act when they really need to.
The Twilight Zone was an innovative and groundbreaking TV science fiction and mystery series made in the 1950s and 60s.
It’s been rebooted several times but some of its most famous episodes have been updated and parodied so much that they become part of the general culture.
So much so that the original moral of these stories tends to get washed out and forgotten in the retelling.
One great example of this is the story of “a kind of stopwatch” that was remade as a film called Clockstoppers and as a part of The Simpson’s Treehouse of Horror halloween specials.
Both in the original and in the Simpsons version - a man or Bart and Milhouse acquire a stopwatch with one unusual extra feature - it can be used to stop time itself.
Like previous owners, they misuse the power, it breaks and while they ultimately repair it they remain marooned in time for several years.
The moral is that while it might be nice to stop time, it can’t be done permanently and time eventually moves on and catches up with us.
But what if you could pause time for long enough to give you space to work on ways to improve the financial outlook for your company or that could stop or freeze creditors actions while you arrange advice and assistance so that when they restart, your business would be in a stronger position to engage with them?
An Insolvency Moratorium might be the answer you’ve been looking for.
It allows businesses to have an enclosed legal breathing space away from creditors’ recovery actions like winding up petitions or bailiff visits while a recovery plan is formed.
This will restructure the company's debts and give creditors more chance of ultimately being repaid rather than seeing the company go into liquidation with the increased risk of not receiving repayment.
When first granted, an insolvency moratorium automatically lasts for 20 working days.
This can be subsequently extended for another 20 business days if required with more extensions available for complex cases and only with the consent of creditors themselves.
An insolvency moratorium is different from administration or a creditors voluntary liquidation (CVL) in several ways.
The company directors remain in control of the business and continue to run it on a day to day basis but a monitor is appointed to make sure that all conditions are being adhered to.
Of course the business also has to keep on paying any rent, employment entitlements or any liabilities that come from financial service contracts and the monitor’s fees and expenses - although this is agreed in advance.
What happens when a moratorium ends and time restarts?
Depending on various factors there are several ways an insolvency moratorium can be resolved.
The business raises new funds and investment from shareholders or directors own funds, or it could include a business loan secured with the aim of consolidating existing company debts into manageable payments.
A CVA is arranged with the creditors approval and the business continues trading and making regular monthly payments to creditors in return for being allowed to continue to trade and a proportion of existing debt being wiped.
Preferably after taking professional advice, the directors or business owner reach an informal payment plan with their creditors to begin paying down the debt. Additionally, if tax arrears are owed then a formal Time to Pay arrangement could be reached with HMRC.
Missing repayments for both could have serious consequences so should only be entered into carefully.
Sadly not every business can be saved even with an insolvency moratorium. If the debt and other issues prove to be insurmountable then the moratorium is ended and the business enters administration or liquidation.
“If you knew time as well as I do, you wouldn’t talk about wasting it” - Alice through the looking glass
Rules are changing at the end of September for winding up petitions and several other instruments including the final end of the furlough scheme.
The end of the year is in sight and the remaining weeks and months should be spent trying to regain momentum and build up to the best Christmas trading period for at least two years.
But what if you’re struggling with deciding which repayments to miss or trying to raise enough liquidity to make the minimum costs needed to avoid running up arrears for bounce back loans or other borrowing?
Even before thinking about an insolvency moratorium or other procedure, you should get in touch with us.
We offer a free initial consultation for any director or business owner who needs some impartial, expert advice on what they can do to help get their business back in shape for a hectic end-of-year period.
You could have more options than you think and if you’ve acted quickly, could even start to implement them and see results very soon.
However time will continue to tick by and if you don’t use it wisely then you could still have the same or worse difficulties later but without the time to fix them.
Which not even a magic stopwatch could help you with.
The ones that if solved or removed, would be a launchpad for the success that would likely follow because all the other fundamentals are strong.
It’s a problem video gamers come up against quite often.
They face a seemingly-impossible end of level boss that no matter what strategy they try, they cannot defeat and get past.
Countless hours have been invested and the familiar but rarely sincere “just one more go” has been invoked more than once but the only certainty has been the same negative result.
In the age of Youtube, Twitch, Discord and even gaming performance coaches - there are more ways to find this assistance - amateur and professional - than ever before so they can proceed towards their final goal.
Which brings us back to businesses in the same situation - where’s their solution and video guide to get them past their immediate insurmountable hurdle and help them to literally level up?
The good news is that it’s far easier to find than asking a bigger kid in an arcade to do it for them.
An administrator can be their extra life and give the company the fresh start it’s been reaching for - preserving jobs and giving the business a power up just when it needs it - but it does come with risks.
To clarify, administration is a formal, legal insolvency process that places an external manager - the administrator - temporarily in charge of a business with the aim of turning its fortunes around and saving the company.
This is a serious decision that can have ultimate consequences for a business so should not be entered into lightly or without getting professional advice first to see if it is the most appropriate course of action.
If this is the case then administration is a proven method of helping otherwise viable businesses restructure and regroup before reemerging stronger than before the administrator takes temporary charge.
Another important point to remember is that the administrator represents the interest of the company’s creditors at all times, not the management.
They’re there to make sure creditors can see the best possible return on their expenditure. If that’s through returning the business to profitable trading then they will pursue that option.
If it’s selling the business under a pre-pack arrangement to new management then that will be their chosen course and if the last recourse to secure their money is through liquidating the business and selling the company’s assets off to generate the best return - then they’ll do it.
Once an administrator is officially appointed they will produce a recovery plan which will always be based on repaying as many debts as possible and looking at ways money can be saved in the immediate and short term to reach the goal of saving the company.
They will be aided by an insolvency moratorium applying immediately which halts all creditor actions, giving the administrator time to put their plans together.
Administration is not an open-ended situation that will be allowed to continue permanently.
A creditors meeting must be held within ten weeks of the administration being entered where they will outline their proposals and their recommendations.
Depending on the unique circumstances surrounding the business - its asset portfolio, cash flow and banking situation - they will inform the creditors what the most realistic outcome will be and what the plan is to achieve it.
This may even involve redundancies or other cutbacks in the short term.
Outcomes
An administration can end in several different outcomes depending on the circumstances and future viability:
The moratorium could give the administrator enough time to solve the immediate financial issues through raising extra funds through asset sales, new investment or informal agreements reached with creditors to settle existing debts.
If this happens then it’s mission accomplished - the administrator hands back the business to the directors who will continue to run the company.
Now free of the financial problems that originally burdened the business.
An administration might not be the only insolvency procedure the administrator needs to employ depending on the circumstances.
If the debt is particularly difficult to restructure and is the main obstacle to the business trading profitably in future then they might decide that a company voluntary arrangement (CVA) is the best option to pursue.
Creditors are approached to see if they will accept a regular, monthly payment from the business in return for writing off a proportion of the overall debt.
This will usually be in their interests as they will stand to gain more from the payments than through any other method including asset sales following liquidation.
If agreed, the directors resume control of the business and it resumes trading with the new CVA payment agreement in place.
The business might be made viable once again but it might fare better under new management or owners bringing fresh ideas, energy and investment.
The administrator will market the business for sale immediately and conclude the deal while the business is still protected by the insolvency moratorium.
The existing directors might even be part of the ownership teams depending on circumstances but once the deal is concluded and the new management is in place then the administrator hands back control to this group and exits.
Sadly the debt and problems of the company might be insurmountable for even the best administrator and the only viable way forward will be to close the business down through a creditors voluntary liquidation (CVL) process.
The business is closed down in an orderly fashion and it’s assets and property are sold off with the returns going to pay off creditors in legal order of precedence.
Because the business will already be in administration before the liquidation process begins, most assets will already have been sold prior to this so once a CVL is entered into, the funds can begin to be distributed to creditors.
In the battlefield of giving business owners and directors the chance to fight another day, it’s our call of duty to give them the best advice and support possible.
We don’t claim to have a halo but if you get in touch and arrange a free initial consultation with one of our expert advisors, we’ll let you know which options and strategies would have the best mass effect on your company’s chances of recovery and renewal.
Business life is strange and unpredictable so we’ll help you go through the gears when it comes to implementing any changes you need to. It’s a far cry from leaving you to manage on your own but an essential part of our service.
If it’s time to reboot your approach, do it with a Business Rescue Expert by your side.
The bounce back loan scheme was a success for many of the businesses who took them out.
They helped them to keep trading or to support themselves and their employees whilst locked down and unable to function normally.
The final official borrowing figures released by the government earlier this year showed that over 1.5 million bounce back loans had been granted for a total of £47 billion - all guaranteed by the government.
Over 44,000 north east businesses took part in the scheme, borrowing an average of £26,751 each or £1.2 billion collectively - an amount equivalent to the cost of building fifty brand new stadiums the size of Sunderland’s Stadium of Light.
27.5% of north east businesses, over one in four, applied for bounce back loan financing, which was the highest demand in the country. The average amount loaned however was the lowest amount - some £7,000 less on average than a London-based business which saves an average borrowing figure of £33,480 per loan - the highest average amount in the country.
Earlier this year, BusinessRescueExpert.co.uk conducted an investigation into the risk of defaults around bounce back loan borrowing done by businesses.
In the North East they found that even under the official best-case scenario, approx. 15% of loans would remain uncollected. That would be 6,729 in our region - with a total of £180 million remaining unpaid.
At around the same time we published our results, the Department of Business, Energy and Industrial Strategy (BEIS) announced that they would begin to enforce bounce back loan debt recovery imminently but carefully.
Business Secretary Kwasi Kwarteng wrote that: “HMRC would adopt a cautious approach to enforcement of debt owed to government that will have accrued” and that HMRC would soon update its enforcement methods so that any outstanding debt could be brought into managed arrangements for businesses affected by the pandemic and subsequent lockdowns.
Specifically he said that using insolvency to enforce payment would remain a last resort and that he recognised that “the path back to full trading will be difficult for many companies, particularly those with accrued debt and low cash reserves.”
If BEIS are playing the good cop in this scenario then the Insolvency Service are playing the bad cop - promoting their recent successful attempts to wind up several limited companies that had been involved in fraudulent activity including dishonestly obtaining bounce back loans.
Dave Elliott, Chief Investigator at the Insolvency Service said: “The bounce back loan scheme was made available to help support businesses during the pandemic.
“It’s outrageous that some directors have been trying to abuse this support, and the action we have taken shows we take this issue extremely seriously.”
Despite the tough talk, just how seriously are the authorities cracking down on bad bounce back loan behaviour by directors and business owners?
One growing trend we’ve noticed recently in the north east and elsewhere is where companies with outstanding bounce back loan arrears are attempting to dissolve their businesses, or have them struck off.
Company dissolution is a perfectly legal method of closing a company but comes with a set of strict conditions.
Dissolution is not an available tool if the company owes any money, including outstanding tax or a bounce back loan.
New legislation, specifically aimed at unscrupulous directors, is due to become law later this year (but will apply retrospectively) and will be a big problem for those who’ve tried to close their company this way and avoid their legal responsibilities.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill 2021 will allow the Insolvency Service to specifically target and pursue directors who close their companies by dissolving their businesses when they have outstanding debts.
One of the main new measures will see the Insolvency Service given retrospective powers to investigate directors of struck off companies and how they acted in the circumstances leading up to the dissolution.
Being retrospective, directors of north east businesses dissolved not only in 2021 but within the past couple of years can expect to be contacted in the near future if they had bounce back loans or tax debt..
Directors of businesses with outstanding bounce back loan debts trying to dissolve their business from now on can reasonably expect to receive an “Objection to Company Strike Off Notice”.
This prevents the company from being struck off and will also be an invitation for any of their other creditors to register their objections to the striking off as well.
Disqualification and fines
No system is 100% perfect so occasionally a business with outstanding debts slips through the net and is struck off.
What are the likely consequences facing directors who have managed to get their businesses struck off with bounce back loan arrears?
In the first instance the Insolvency Service will be looking to disqualify any directors of companies who have allowed their business to be struck off when it has debt.
The disqualifications will be for up to 15 years depending on the circumstances. The directors will also be personally liable for fines and any costs incurred.
State of play
So now you’ve got a better idea of what could happen - we thought we’d go one step further and find out what’s actually going on with dissolution objections right now.
Businessrescueexpert.co.uk lodged an FOI inquiry with BEIS earlier this month to ask if they are actively filing objections with Companies House against businesses with outstanding bounce back loans that are looking to be struck off.
We also asked on what legal basis these objections were being lodged under.
BEIS confirmed that it is filing objections where “a strike off notice has been issued against a company which has an outstanding bounce back loan”.
Liquidation - a proper alternative to striking off
Now we have official confirmation that dissolutions are being officially objected to - with the consequences we’ve outlined - what can worried north east directors do?
Bounce back loan repayments are falling due, and the last support measures and protections against creditor actions are being removed within weeks.
All of this adds increased pressure to cash flows that are already squeezed to the limit as they try to manage all the outgoings with reduced income - if they’re able to trade without restriction once again.
If a business is genuinely unable to meet all of its obligations and liabilities including bounce back loan arrears then there is still one legal insolvency process they can follow that would allow them to close their company, settle their debts and move on to the next chapter of their career efficiently and effectively.
Company liquidation, or specifically a creditors voluntary liquidation (CVL), is the best route for a business with outstanding debts including unpaid bounce back loans, to follow.
Once they’ve engaged a licensed insolvency practitioner, they will immediately take over all dealings with creditors and work through the rest of a businesses debts to compile a full picture of who is owed and how much.
Chris Horner, insolvency director with Businessrescueexpert.co.uk, said: “Our FOI inquiry has proven that HMRC are treating improperly dissolved and dissolving companies as their highest priority, which should effectively close off this avenue for directors looking to close down their businesses.
“We can expect to see more compensation orders being used to make directors personally liable for the debts of their struck off businesses if the Insolvency Service believe they’ve been done incorrectly or to evade oversight.
“Another common misunderstanding about bounce back loans is that because they are underpinned by government guarantee, they won’t be chased by lenders. They will.
“The lender will try to secure repayment for at least 12 months as standard as a condition of reimbursement because they will have to show the government they tried to recover the funds they lent.
“They probably won’t start insolvency proceedings just for bounce back loan debt but when restrictions are lifted at the end of September they could use debt collectors and bailiffs to enforce repayment.
“If a business chooses to liquidate instead then the bounce back loan will be treated as any other unsecured debt and if the directors have fulfilled their duties to the best of their abilities, then the lender will ultimately be repaid by the government.
“The most important thing any business in the north east or anywhere else that’s having difficulties repaying any debts, including bounce back loans, can do right now is to get professional insolvency advice.
“The rules literally change at the end of September so if they use this time constructively to protect themselves and their business financially and legally, they could already have moved onto their next venture by the time this happens.”
The bounce back loan scheme was a success for many of the businesses who used it to help them to keep trading or to support themselves and their employees whilst lock down was in effect.
The final official borrowing figures released by the government showed that over 1.5 million bounce back loans had been granted for a total of £47 billion - all guaranteed by the government.
Earlier this year, BusinessRescueExpert.co.uk conducted an investigation into the risk of defaults around bounce back loan borrowing and found that even the official best-case scenario would see nearly 230,000 loans remaining unpaid for a total of £6.9 billion - or the equivalent of building six new stadiums the size of Wembley.
At around the same time the Department of Business, Energy and Industrial Strategy (BEIS) that they would begin to enforce bounce back loan debt recovery imminently but carefully.
Business Secretary Kwasi Kwarteng wrote that: “HMRC would adopt a cautious approach to enforcement of debt owed to government that will have accrued” and that HMRC would soon update its enforcement methods so that any outstanding debt could be brought into managed arrangements for businesses affected by the pandemic and subsequent lockdowns.
Specifically he said that using insolvency to enforce payment would remain a last resort and that he recognised that “the path back to full trading will be difficult for many companies, particularly those with accrued debt and low cash reserves.”
If BEIS are playing the good cop in this scenario then the Insolvency Service are playing the bad cop - promoting their recent successful attempts to wind up several limited companies that had been involved in fraudulent activity including dishonestly obtaining bounce back loans.
Dave Elliott, Chief Investigator at the Insolvency Service said: “The bounce back loan scheme was made available to help support businesses during the pandemic.
“It’s outrageous that some directors have been trying to abuse this support, and the action we have taken shows we take this issue extremely seriously.”
Despite the tough talk, just how seriously are the authorities cracking down on bad bounce back loan behaviour by directors and business owners?
One growing trend we’ve noticed recently is where companies with outstanding bounce back loan arrears are attempting to dissolve their businesses, or have them struck off.
Company dissolution is a perfectly legal method of closing a company but comes with a set of strict conditions. It is not an available tool if the company owes any money, including tax or a bounce back loan. New legislation, specifically aimed at unscrupulous directors, is due to become law this year (but will apply retrospectively) and will be a big problem for those who’ve tried to close their company this way and avoid their legal responsibilities.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will allow the Insolvency Service to specifically target and pursue directors who close their companies by dissolving their businesses when they have outstanding debts.
One of the main new measures will see the Insolvency Service given retrospective powers to investigate directors of struck off companies and how they acted in the circumstances leading up to the dissolution.
Being retrospective, directors of businesses dissolved not only in 2021 but within the past couple of years can expect to be contacted in the near future if they had bounce back loans or tax debt..
Directors of businesses with outstanding bounce back loan debts trying to dissolve their business from now on can reasonably expect to receive an “Objection to Company Strike Off Notice”.
This prevents the company from being struck off and will also be an invitation for any of their other creditors to register their objections to the striking off as well.
Disqualification and fines
No system is 100% perfect so occasionally a business with outstanding debts slips through the net and is struck off.
What are the likely consequences facing directors who have managed to get their businesses struck off with bounce back loan arrears?
In the first instance the Insolvency Service will be looking to disqualify any directors of companies who have allowed their business to be struck off when it has debt. The disqualifications will be for up to 15 years depending on the circumstances. The directors will also be personally liable for fines and any costs incurred.
So now you’ve got a better idea of what could happen - we thought we’d go one step further and find out what’s actually going on with dissolution objections right now.
Businessrescueexpert.co.uk lodged an FOI inquiry with BEIS earlier this month to ask if they are now filing objections with Companies House against companies with outstanding bounce back loans that are looking to be struck off.
We also asked on what legal basis these objections were being lodged under.
BEIS confirmed that it is filing objections where “a strike off notice has been issued against a company which has an outstanding bounce back loan”.
Now we have official confirmation that dissolutions are being officially objected to - with the consequences we’ve outlined - what can worried directors do?
Bounce back loan repayments are falling due, and the last support measures and protections against creditor actions are being removed within weeks.
All of this adds increased pressure to cash flows that are already squeezed to the limit as they try to manage all the outgoings with reduced income - if they’re able to trade without restriction once again.
If a business is genuinely unable to meet all of its obligations and liabilities including bounce back loan arrears then there is still one legal insolvency process they can follow that would allow them to close their company, settle their debts and move on to the next chapter of their career efficiently and effectively.
Company liquidation, or specifically a creditors voluntary liquidation (CVL), is the best route for a business with outstanding debts including unpaid bounce back loans, to follow.
Once they’ve engaged a licensed insolvency practitioner, they will immediately take over all dealings with creditors and work through the rest of a businesses debts to compile a full picture of who is owed and how much.
Chris Horner, insolvency director with Businessrescueexpert.co.uk, said: “Our FOI inquiry has proven that HMRC are treating improperly dissolved and dissolving companies as their highest priority, which should effectively close off this avenue for directors looking to close down their businesses.
“We can expect to see more compensation orders being used to make directors personally liable for the debts of their struck off businesses if the Insolvency Service believe they’ve been done incorrectly or to evade oversight.
“Another common misunderstanding about bounce back loans is that because they are underpinned by government guarantee, they won’t be chased by lenders. They will.
“The lender will try to secure repayment for at least 12 months as standard as a condition of reimbursement because they will have to show the government they tried to recover the funds they lent.
“They probably won’t start insolvency proceedings just for bounce back loan debt but when restrictions are lifted at the end of September they could use debt collectors and bailiffs to enforce repayment.
“If a business chooses to liquidate instead then the bounce back loan will be treated as any other unsecured debt and if the directors have fulfilled their duties to the best of their abilities, then the lender will ultimately be repaid by the government.
“The most important thing any business having difficulties repaying any debts, including bounce back loans, can do right now is to get professional insolvency advice.
“The rules literally change at the end of September so if they use this time constructively to protect themselves and their business financially and legally, they could already have moved onto their next venture by the time this happens.”
So while business continues whether you’re on holiday or not, it’s a good time to look back on what’s happened to businesses in the second quarter of the year - that covers data from April 1 to June 30 2021.
The Insolvency Service have published their second quarterly bulletin of the year revealing the total number of company insolvencies reported during this period and they show another uptick in insolvency activity.
When you look at the story of 2021 so far it resembles a giant V - recovering the numbers lost in the previous quarter.
The overall number of company insolvencies for England and Wales from April to June 2021 was 3,116 - 31% higher than the previous three months data and 4% higher than the same period in 2020.
This is also the highest quarterly total since the beginning of the pandemic.
The main driver is the increase in creditor voluntary liquidations (CVLs).
Every other company insolvency procedure - administrations, CVAs and compulsory liquidations - was lower both in the previous quarter and the same quarter of the previous year.
Q2 2021 (dark) v Q1 2021 (light)
The 3,116 recorded company insolvencies was made up of:
CVLs made up 90% of insolvency cases in England and Wales between April and June this year with administrations taking 5% of cases; compulsory liquidations reached 3% and only 1% of cases were CVAs.
There were a total of 165 company insolvencies in Scotland in Q2 2020, Up 91 or 32% higher than a year ago. This was made up of:
In Northern Ireland there were 23 company insolvencies, Up 15 or 35% higher than Q2 2020. This was comprised of:
The total company insolvencies for the UK for Q2 were 3,304 - an increase of 814 from the first three months of the year.
The Insolvency Service reiterates that the historic low levels of company insolvencies compared to pre-pandemic numbers are due to several factors - some temporary while others might be more influential in the medium to longer terms.
Along with the unprecedented and historic level of government back financial support measures such as the bounce back loan scheme, suspensions of creditor recovery actions such as winding up petitions and a backlog of cases working through a court system that is still working someway below capacity have all had an influence.
Additionally, the introduction of the Corporate Insolvency and Governance Act 2020 brought in new legal powers including a statutory insolvency moratorium period and court sanctioned restructuring plans.
Since the introduction of the act on 26 June 2020, there have been five companies obtaining a moratorium and a further nine that had their restructuring plans approved and implemented by the courts. These measures are noted by the Insolvency Service but are not included within the statistics as they are not classed as formal insolvency processes.
Liquidation Rates
The liquidation rates figures (a number per 10,000 active companies) tends to give us a clearer picture of the broader trends at work as they indicate the probability of a company entering liquidation rather than the number that actually have.
They are immune to one-off fluctuations or other factors and are more comparable over longer time periods than absolute figures. They indicate underlying trends affecting businesses so we can have a broader view of the direction of insolvency momentum.
The figure is calculated based on the data from a 4-quarter rolling rate per 10,000 active companies so the rates for Q2 2021 used data covering the periods from Q3 2020 to and including Q2 2021.
The liquidation rate for this period is 25.9 per 10,000 companies or 1 in 386 companies being liquidated in the 12 months ending on June 30 2021.
This figure is slightly higher than the previous quarter (25.3 per 10,000 or 1 in 396 businesses) but lower than the corresponding figure from Q2 2020 (36.9 per 10,000 or 1 in 271).
If HMRC are getting serious about your bounce back loan debt - what can you do next?
Insolvencies by industrial sector
Compared to the same time period a year ago, every industrial sector has seen a decline in insolvency rates
The three industries that saw the highest number of insolvencies were:
The construction industry continues to have a larger number of insolvencies than any other sector but the total number in the past 12 months is 36% lower than the previous period.
Colin Haig, President of R3, the insolvency and restructuring trade body said: “The increase in corporate insolvencies - to the highest total in 18 months - has been driven by a rise in creditors voluntary liquidations (CVLs) which have increased to pre-pandemic levels.
“It’s hard to say what’s driving this increase in CVLs but it could be that directors of a number of companies have decided they can no longer go on trading as a result of the pandemic, and are opting to close down their businesses by using the CVL process, before the situation deteriorates further.
“What is clear is that the figures show the toll the challenges of the last three months - and the twelve before them - have taken on the business community.
“While many business owners were hoping the lifting of the lockdown would help them, they reopened amid low consumer confidence, a time when people were being encouraged to stay local, and when the economy was still a long way from recovering from the start of the pandemic.
“The formal end of lockdown may have improved their situation but it wasn’t the boost many businesses had hoped for.
“However, the government’s support measures have remained in place over this period and are likely the reason why today’s increase isn’t as severe as it could have been.
“This support has been a lifeline for many businesses, but with the end of furlough in sight, directors now need to take the time to plan for how they’ll manage when this initiative ends.”
Is this summer your last chance to save your business?
The key takeaway from these latest statistics is that despite government support still being largely in place through the coronavirus job retention scheme and statutory demands, winding up petitions and other enforcement measures remaining suspended, company insolvencies have increased relatively sharply.
Bounce back loan repayments are coming due, business rates liability is due to resume and as the remaining support measures are finally wound up and creditors are within sight of being able to take unrestricted action once more, it’s reasonable to assume that by the end of the year if not Q3, these figures will be higher still.
So what can an informed and responsible business owner or company director do - right now - to help their company through the turbulent next few weeks and months?
How about talking?
A problem shared might not be halved but getting in touch with us to arrange a free initial consultation chat will feel like a weight is lifted.
Once we get a better understanding of your unique circumstances, we’ll be able to advise you on what strategic and tactical steps you can take in the short and medium terms to bolster your business.
As the figures are beginning to show, not every company will be able to navigate the storm ahead but there are other options available that we can discuss that could lead to an alternative and ultimately better outcome than trying to rescue an unviable enterprise.
By the time Q3 ends on September 30, many business owners will wish they had extra time available to tackle their most pressing issues.
Make sure you use yours now.
For England and Wales, the total number of corporate insolvencies for June was 1,207 - up 196 from the 1,011 recorded in May - a rise of 16%.
By way of comparison to the same period 12 months ago - these figures are 63% higher than June 2020 but remain 18% lower than a pre-pandemic June 2019.
The upward trend is the first consecutive monthly rise since October and November 2020. Those figures might have been expected to climb for a third month in a row if it hadn’t been for the third lockdown initiated in December 2020.
Although compulsory safety measures such as mask wearing and social distancing have been discontinued since July 19th, the number of Covid-19 cases continues to rise across the country at levels greater in some areas than last Autumn which directly preceded another lockdown.
With support measures due to be fully withdrawn at the end of September and creditor actions such as statutory demands and winding-up petitions being reintroduced at the same time, insolvency statistics could begin to rise at a faster rate from October onwards.
The 1,207 company insolvencies in England and Wales consisted of 1,116 creditors voluntary liquidations (CVLs); 38 compulsory liquidations; 39 administrations and 14 company voluntary arrangements (CVAs). There were no receivership appointments in June.
The only category that saw an increase on the previous month are creditor voluntary liquidations which are up by half and while CVAs have remained at the same number, administrations and compulsory liquidations had both fallen.
CVLs are the only insolvency category that was higher than its pre-pandemic equivalent, at their highest recorded level since March 2019, with the rest down 60% or greater.
Additionally, there were 77 company insolvencies in Scotland comprising 14 compulsory liquidations, 62 CVLs and one administration which was 67% higher year on year and 13% higher than in June 2019.
This was the highest number of monthly insolvencies recorded since February 2020.
Scottish company insolvencies tend to be driven by compulsory liquidations but since the advent of the first Covid-19 lockdown in March 2020, there have been nearly twice as many CVLs as compulsory liquidations - being the most frequent type of insolvency for 13 out of 14 months.
There were also 11 company insolvencies registered in Northern Ireland - 22% higher than in June 2020 but 62% lower than June 2019.
This was made up of one compulsory liquidation, nine CVLs and one administration.
The overall total of UK-wide company insolvencies for June 2021 is 1,295, an overall increase of 226 from last month’s collective total.
“Uneconomic to continue trading”
Christina Fitzgerald, Vice President of R3, the insolvency and restructuring trade body said: “The increase in corporate insolvencies between between May and June - to the third highest monthly figure since the pandemic started - has been driven by a rise in Creditors’ Voluntary Liquidations (CVLs).
“The Government’s decision to delay lifting the final Covid-19 restrictions for another month has clearly been a further blow to the business community and may have been particularly unhelpful for the hospitality and retail sectors, which have been hit hardest by trading restrictions and lockdowns.
“It may be that this impact has been reflected in June’s statistics as the rise in CVLs, used by directors to voluntarily close a company, suggests that for many directors the delay to the removal of the restrictions may have simply made it uneconomic to continue trading.
“However, we are heartened by the Business Secretary’s recent comments on HMRC’s planned approach to working with distressed businesses. In particular, the news that HMRC will take a supportive approach to rescue proposals from viable businesses is welcome, and we hope will support the profession’s efforts to support Covid-19 hit firms.
Summer is usually the time when people are looking at holidays and taking it easy so businesses will either be enjoying their slowest or busiest periods of the year depending on their location or industry.
This year has once again proved that normal service is a long way from being resumed.
The one thing we can say with absolute certainty is that the specialist advice is as good an investment of time right now as anything.
Whether it’s looking at making slight corrections to make a company more efficient and streamlined when demand picks up after the heatwave and home holidays dissipate, or looking at bigger restructuring or more drastic but necessary action - expert guidance is available here and now.
We offer a free initial consultation where we can learn more about your immediate challenges and provide you with a range of effective and efficient options that can be implemented to help any business get back on the right track.
Being able to make a real and lasting difference in someone’s life, give them the opportunity to be more self-sufficient, or restore some functionality or normality to their lives would be tremendous.
Charities are one of the sectors that hold society together by meeting demands that the public and private sector can’t or aren’t set up to meet.
But they have to function according to the same rules as other businesses or organisations which means that they must pay their debts when they come due and are just as liable for the consequences as any other organisation if they can’t.
There are options for them depending on their situation which they can take advantage of to rescue or restructure the charity to keep going.
Alternatively, if the situation can’t be reasonably salvaged then there are efficient and effective options to close down and possibly reform without debt.
Regular businesses have management structures or a board of directors in place to oversee their day to day affairs and monitor medium and long term strategy.
In the case of charities, a trustee body will assume this essential duty and look after operations and governance as well as finance.
It might seem boring compared to the more fulfilling and exciting aspects of charity service provision but carefully monitoring the budgets, accounts, projections and financial reports of the enterprise will give important indicators on the overall financial health of the enterprise.
They will be the first warnings of potential insolvency through two key indicators:
There are other practical assessments the trustees can make including a cash flow test and balance sheet test but any of these should indicate potential trouble.
The first thing trustees should do is get professional advice from an insolvency practitioner. Even if they aren’t being threatened with winding up by creditors immediately, they will be able to offer support and ideas on what to do to prevent these threats coming to pass if possible.
If there is an immediate shortfall, the first thing that can be done is an immediate audit to see what costs can be reduced at short notice.
It will take longer but some assets and investments could be realised to provide additional funds or ultimately there could be some reduction of staffing or service provision if it means the charity as a whole can survive.
Further borrowing options could be explored through extending current lending facilities or considering new ones if the situation is considered mainly temporary.
If the situation is more serious and creditors are beginning to demand repayment with legal recourse then the picture is clearer and requires immediate action.
They can consider an administration procedure which automatically gives the charity an insolvency moratorium which halts all action against it - giving valuable breathing space for trustees to work out their next steps.
In an administration, an insolvency practitioner (the administrator) takes over the running of the charity temporarily to see if it can be restructured appropriately and other changes made that will allow it to resume its activities.
Another alternative can be entering into a company voluntary arrangement (CVA) with the charity's creditors.
This would see a proportion of outstanding debt written off with the remainder paid to creditors in a series of regular monthly payments based on the expected cash flow coming into the charity.
Payments must be kept up with to avoid further action but this is an equitable solution to debt problems that could otherwise lead to closure.
If the problems are more manifest and there is no realistic way of returning the organisation back to profitability then the only realistic option would be closing down through liquidation but the method will differ depending on the charity’s structure.
This process is very similar to that of liquidating any other limited company.
Charitable companies limited by guarantee are registered at Companies House and their members determine their aims, objectives and fundraising.
The difference between them and regular limited companies is that any profits are invested in their mission, not distributed among shareholders as dividends.
They can become insolvent like any other business and if they do and have to close then they will either choose to undergo voluntary liquidation or in the worst case scenario, will face compulsory liquidation.
A creditors voluntary liquidation gives trustees more control over the process although a licensed insolvency practitioner will have to oversee the process in either scenario.
Their job is always to protect the interests of creditors by selling off any assets to recoup as much money back as they can. Once this process is completed then the organisation is removed from the charity register at Companies House and it will cease to exist.
Voluntary liquidation and compulsory liquidation are still options for charitable incorporated associations with some minor modifications although this incorporated charity structure isn’t registered at Companies House.
An important point to underline is that members of charitable incorporated associations are usually protected from personal liability for the organisation’s debts.
Unlike other charitable organisations charitable trusts are classed as unincorporated entities.
This means that the trustees overseeing the objectives and charity finances are personally responsible for any debts incurred by the organisation.
In the event of closure, the trust deeds will usually include a procedure for instigating a winding up petition as the most efficient and effective method.
An unincorporated association, by its nature, is not treated as a separate legal entity to its members.
Because of this, if this type of charity becomes insolvent then the members are not protected and could be held personally liable for any outstanding debts incurred.
Also, unincorporated associations cannot make use of any formal liquidation procedures but directors can still get advice and should if they’re in this situation.
The short answer is yes with an important but.
It might be possible for them to operate as a going concern in the short term and avoid a winding up process but the onus is on directors & trustees to ensure that new financing is being sourced or other measures being taken to achieve solvency.
Directors have a duty to ensure any business does not continue to trade if there’s no reasonable hope of recovery - Otherwise the charity could be regarded as wrongful trading with consequences for those directors if proven.
Running a charity might be even harder than managing a similar sized business.
They have to raise sufficient funds to make a profit and pay all their suppliers, staff and creditors on time. Charities have to do this as well as using the funds to run services their users find essential.
So if a charity runs into financial difficulties, and the past 18 months will have affected giving and donations as much as any other sector, it will feel doubly difficult and that users are being let down. Customers can go to other providers but for the users of many charities, this isn’t an option.
The Charity Commission says that in the event of potential charity insolvency, directors and trustees should get immediate advice.
We’ll get a better idea of what your situation is and be able to let you know your options in plain english.
Depending on your charity’s model, we can let you know what you can do and if there are any special circumstances or accommodations that you have to make.
We can then help you implement your decisions quickly and effectively to help you get on with doing the great work your charity has always done.
