Insolvent Business Due to COVID? Here’s What You Do Need to Do

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The impact of the COVID-19 pandemic left almost no industry sectors unscathed. The increased financial burden on consumers, the rising production costs, and the expenses associated with the need to adjust to a rapidly shifting work model left many companies in a weakened state. As could have been expected, the ones that were hit the hardest were start-ups and SMEs (small and medium-sized enterprises). Most governments found themselves forced to enact support programs to lessen the financial pressure on these vulnerable enterprises during the pandemic.

The UK was not an exception. As SMEs represent more than 90% of all firms, 60% of the jobs, and over 50% of the sales in most developed economies, preserving them and maintaining a healthy business environment is crucial. The UK government implemented several programs for financial aid, with the biggest being the Bounce Back Loan Scheme (BBLS). Companies also benefitted from a temporary moratorium that restricted creditors from serving statutory demands or winding up petitions for debts brought on by the coronavirus. Unfortunately, the end of these measures has left businesses once more to try and survive on their own.

Record Number Of Voluntary Insolvencies

Without the safety net of the measures, England and Wales registered the biggest number of companies going into voluntary insolvency. To be more precise, according to the Insolvency Service, there have been exactly 4,175 creditors voluntary liquidations during the last quarter of 2021, meaning that the directors of the companies chose to put their business into a liquidation proceeding without being forced to do so by formal court order. This is the highest quarterly number ever recorded since the statistic began to be tracked back in 1960. Creditors’ voluntary liquidations have often been used as a tool by smaller businesses that do not have the sufficient resources to pay their outstanding debts.

Falling into insolvency doesn’t necessarily mean the end, though. With the help of a professional insolvency firm, the ailing companies could manage to successfully finish the process and come out in an even stronger position. It may be crucial, however, to seek the help of insolvency experts that are intimately familiar with the current government as well as local regulations and procedures, such as insolvency practitioners in London for businesses whose main operations are focused on that area. With an insolvency expert on its side, the struggling company can receive guidance based on its unique circumstances and choose the available option that will achieve the best possible outcome.

Staying Open While In Insolvency

Opening insolvency proceedings doesn’t necessarily mean that the company is closing down. Several avenues can allow the business to continue operating and hopefully stabilize its finances enough to start covering its debts. One such option is entering into an informal agreement with its creditors. If the current difficulties are believed to have a temporary nature and the creditors do not exhibit any inclination towards taking formal action, the start-up may be able to renegotiate some of the debt’s terms. Unfortunately, an informal agreement is not legally binding, and the creditors could decide to withdraw from it at any time.

A company voluntary agreement (CVA) carries most of the characteristics of an informal agreement, but this time it is a binding agreement between the financially-strapped company and its creditors. The CVA can be proposed by the business’ directors and could address the repayment of all or part of the company’s outstanding debts over a newly agreed-upon fixed period.

Administration

Administration is another formal insolvency procedure that may be the appropriate course of action if the start-up or company has proven to have a viable product. In these cases, control over the company’s operations is handed over from the directors to a specially appointed ‘administrator.’ The chosen administrator must be an insolvency practitioner, and while in charge, they must propose a plan to stabilize the business’ financial state. While the administration process is in effect, the creditors of the start-up cannot take legal action related to the recovery of their debts. Furthermore, they cannot initiate a compulsory liquidation without first acquiring permission from the court. An administration, by design, is limited in its duration to a maximum of 12 months, with a potential extension of another 12 months.

Rebecca Grewcock
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