The coronavirus pandemic and resultant fallout of Brexit has brought unparalleled levels of uncertainty and risk to the UK economy.
The consequences of COVID-19 have been indiscriminate and far-reaching. Very few sectors emerge without affect from perpetual lockdown restrictions and the resultant strangulation of free movement and free enterprise. Many businesses have had to rapidly adapt to an ever-changing and hugely unpredictable commercial environment.
Some UK SMEs have taken on Government-guaranteed debt. This is often with more hope than certainty that the business will recover sufficiently to afford its repayment. Others have taken a knife to their cost base, downscaling to meet reduced demand. Even larger corporates are deferring or cancelling key investment decisions leading to future productivity concerns in order to maintain control.
Through these challenging times, the ability for directors to exercise control over their businesses depends on several factors. These include managing an adequate liquidity position; maintaining the support of key stakeholders including funders, suppliers and HMRC; and protecting the business from risks that could threaten its short and medium-term viability. Those who take decisive action and meet challenges head on give their businesses the best possible prospect of navigating through the stormy waters ahead. Those who fail to act risk losing their tiller from their hands.
Threats to control
The eventual loss of control of a business by its directors can often track back to trigger events such as the following:
Failure of a large customer
The loss of a key customer could result in both a loss of trade and future profits and a significant bad debt that could result in an immediate loss of funding.
An absence of cash flow headroom and a failure to make critical payments such as payroll, insurance or key suppliers could force a business to cease trading. This can be due to staff walk away, goods or services no longer bought, or legal requirements such as insurance cannot be met. In addition, the loss of credit insurance covering key customers or the loss of trade credit from suppliers could combine to further stifle available working capital.
Loss of stakeholder support
Loss of support of a key stakeholder such as a charge-holder, regulator or pension trustee could see the stakeholder enforce their security, remove licences to trade or inform regulators to exert pressure on the business.
Enforcement action by a creditor/HMRC
Enforcement action may occur because of the non-payment of commercial or tax debts. A winding-up petition can be shown within seven working days of serving a petition. This can result in the freezing of a business’s working capital facilities and clearing accounts. This often makes it difficult to meet critical payments.
If action is not prompt in the face of threats, consequences can be challenging and even terminal. Matters can quickly escalate from operational difficulties, to cash flow problems, funding requirements and ultimately enforcement action.
The above threats could even result in even legal or enforcement action against a director. This could be either in their position as office holder, personal guarantor, or licensed individual with respect to a regulator. The deferral of key decision making, delays in seeking advice, and a failure to proactively tackle key risks could result in directors losing control of the business either by a charge-holder, a creditor or even the Government’s Official Receiver office if the company is subject to a Compulsory Liquidation.
Steps to take control
What steps are there to ensure that directors can protect the control of their business?
There are many steps that a management team should consider in order to tackle threats of cash flow difficulties, continuity of supply from creditors, pressure from key stakeholders and the risk of enforcement action.
As in distressed situations, effective communication and early engagement is critical. Avoiding angry phone calls from an overdue supplier or placing that threatening letter from HMRC back in the in-tray may sound like easiest course of action in the short-term. However it generally escalates problems rather than finding the solution to solve them. As problems get worse, a loss of control becomes one step closer.
Here are some of practical steps you can take to proactively manage risk and safeguard against threats to control:
Communication with Trade Creditors
If trade creditor arrears accumulate and continuity of supply is under threat, an open and ongoing communication with suppliers is key to preventing a loss of confidence. When liaising with creditors, only promise what you can deliver, preferably with some margin of headroom to allow for underperformance. Adverse reactions from creditors are often many times worse on the back of broken assurances. This risks resulting in the loss of goodwill forever. Where possible, seek to ringfence arrears into affordable payment plans. This allows the creditor to see their arrears brought up to date in a manner with structure.
Time To Pay Arrangement
Entering into proactive discussions in respect of business tax arrears and agreeing a formal payment plan can provide long term security and mitigate the risk of enforcement action by HMRC.
A full/partial refinance of a business’s existing working capital facilities and/or equity fund raising can provide the appropriate headroom to ensure critical payments are made on time. This can also rebuff any potential enforcement action from creditors. PMD has access to over 100 lenders with varying risk appetites. Many of whom are familiar with lending in turnaround situations.
Engagement with stakeholders
Early engagement with funders, investors and other stakeholders is often key to finding a solution. If stakeholders believe they’re brought into a situation at the eleventh hour, they could be less likely to support a turnaround strategy. Especially if they have full security.
A solvent solution may not be possible. However, there are formal restructuring options that still enable the director/shareholder to maintain control of their business. These include:
- Company Voluntary Arrangement (“CVA”) – A CVA can be an attractive restructuring solution because an integral feature of a CVA is the maintenance of control by the shareholders and management team throughout the process. In addition, a CVA is not a terminal event (the company as a legal entity survives). A CVA is a compromise arrangement with the company’s unsecured creditors to restructure its debts within a five year period. Creditors vote for a CVA and this can include either debt forgiveness or full repayment of the company’s debts.
- Administration – Although the management team may lose control of the appointment process to a lender or body of creditors, there exists a framework whereby a sale of the company’s business and assets can be completed to the incumbent management team, provided certain criteria are met.
For directors who have found themselves in unknown waters, many initial strategies can be put in place. These strategies can mitigate risk, create headroom, and safeguard viability. This is often the only realistic life raft available to secure the assistance from turnaround professionals who are used to stressful situations. They usually have a proven track record in business rescue and avoiding unnecessary insolvency processes.
PMD partners with a select group of professionals with a proven track record of helping businesses. Especially when they need to overcome the most difficult of circumstances.
Together we bring a wealth of experience and expertise across a range of operational, financial, funding and restructuring areas. This could hold the key to you maintaining control of your business. It could also help you to navigate back to calmer waters.
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