For many of us, the word “lockdown” will be as enduring, symbolic and evocative of the time in which we live as the word “Blitz” was to the Londoners of the 1940s. We will never forget it.
But the most pressing question for many businesses, whether great or small, from international airlines to SMEs and even sole traders, will be “can we survive it?” All businesses depend on cashflow, and while firing or furloughing the staff can save on the wage bill, there are still other costs, both fixed and variable, which will continue to accrue, and with no money coming in, the majority of owners will find, if they have not already, that their business is “insolvent”, which means simply that it is unable to pay its debts and liabilities, as defined in the Insolvency Act 1986 s.123.
One of the crippling results of the Lockdown is the chain effect it has: a business which through prudent trading might otherwise have enough assets to survive the hiatus finds that its main customers cannot pay it what they owe and as a result through no fault of its own it cannot pay its own debts. Unless it can either force its own debtors to pay what they owe, or find some reserves, savings or financing, that it may be time to call in the administrators.
No business wants to do this, as it is seen by many as the “end of the road” even though this is not always the case. The barristers and solicitors at PanLaw’s Insolvency Team are able to advise clients on their rights and liabilities and represent them in pursuing debtors, either by money claims or through insolvency proceedings against those debtors, or resisting statutory demands or petitions from their creditors, or, if the circumstances warrant and the client wishes, the appointment of administrators or voluntary members’ winding up.
For example, business managers need to be aware of the provisions in the Insolvency Act relating to “wrongful trading”, which can happen when a director of a company fails to minimise the losses to the creditors when he or she knew or should have known that there was no reasonable prospect of avoiding insolvency: a nominally objective test for what is in reality a very subjective decision. The government has announced a three month “holiday” from the effects of these provisions, from 1st March to 1st June, but that date is less than a month away and directors will need to prepare for the resumption of their liability soon.
Another part of the Insolvency Act 1986 of which directors and business owners need to be particularly aware at present are the provisions against debt avoidance and transactions at an undervalue, where assets may be disposed of at less than their true value. It may be tempting to have a “fire sale” in order to get in cash for a failing business, but if insolvency follows, then the directors may fund themselves personally liable for the shortfall.
Similarly, directors and business partners can face disqualification following insolvency or winding up if they are found to be “unfit” by reason of their acts or omissions whilst a director, or failed to co-operate with the receiver, or otherwise breached their many and varies obligations under the Companies or Insolvency Acts. There is also criminal liability for more serious or persistent breaches.
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