Call to extend Covid-19 insolvency protection

The government should extend emergency Covid-19 insolvency measures or risk seeing a raft of company collapses and job losses later this year, the Institute of Directors (IoD) has warned

Under normal circumstances, directors have a strict duty to cease trading if their company is facing insolvency and may face financial or legal liabilities if they seek finance instead of doing so. In June, the government introduced emergency coronavirus legislation to suspend the threat of liability for such 'wrongful trading'.

This protection runs out on 30 September, and the IoD said that failure to extend the measure could lead to 'entirely preventable company collapses'.

The institute argued that the measures should be extended to the end of the year, to aid the economic recovery from the pandemic and to safeguard jobs.

Roger Barker, the IoD’s director of policy and corporate governance, said: ‘The recovery has begun, but businesses are not out of the woods yet. As we start to emerge from the pandemic, many normally successful small firms are in a perilous position, and we must give them a chance to get back on their feet.

‘The government has rightly supported business survival, and emergency legislation in June was an important step. The need for this support has only intensified as we enter the next stage of the recovery. Firms trying to adjust will face steep costs and limited revenues.

‘Without these measures, we could see some entirely preventable company collapses, putting our economic recovery and jobs at risk. Directors must be in a position to see their organisations through the crisis - they shouldn't be penalised for acting responsibly amid unprecedented circumstances.’

The Corporate Insolvency and Governance Act 2020 became law on 25 June 2020. The emergency legislation introduced a time-limited suspension of liability for wrongful trading applying from 1 March to 30 September 2020.

Before the emergency measures were introduced, under the Insolvency Act 1986, the board of directors has a strict duty to announce a cessation of trading if the company is insolvent – or if insolvency cannot realistically be avoided in the near future.

In that situation, the 1986 Act requires a company to be placed into an insolvency procedure – such as administration or liquidation – in order to safeguard the interests of the company’s creditors. Under the 1986 Act, failure to do so carries the risk of personal liability.

The suspension of wrongful trading does not affect directors' wider liabilities under company law, for instance around fraudulent trading.

Source: accountancydaily


UK insolvencies to rise by over a quarter this year - credit insurer Atradius

Insolvencies were down in H1, but will end up 27 per cent above last year's

Insolvencies in the UK are set to jump 27 per cent this year as the fallout from the coronavirus continues, according to Atradius.

The credit insurer said that the growth in companies going bust will outpace the global figure (26 per cent), with the UK also seeing the largest GDP contraction in Northern Europe.

Turkey is expected to see the largest growth in insolvencies globally at 41 per cent, followed by the US and Hong Kong at 39 per cent.

Simon Rockett, senior underwriting manager for Atradius UK, said: "The coronavirus pandemic has been indiscriminate in its spread across the globe, resulting in lockdowns and containment measures which have had a tangible impact on economic markets.

"This has included delays in production, a drop in business and consumer demand and widespread business closures.

"While many countries have implemented fiscal stimulus measures to soften the blow, these cannot last forever and worldwide economies are starting to realise the true economic impact in the form of recession and a bleak return to rising insolvency levels."

Atradius said that the number of insolvencies in the UK were "peculiar" in H1, seeing a decline of 20 per cent year on year which did not reflect the state of the economy.

The credit insurer said that this was likely because the UK had announced changes to its insolvency regime prior to the pandemic. Temporary measures are also in place for struggling businesses until the end of this month.

The lowest increases globally will all be in Europe, Atradius said, naming Germany, France, Austria, Belgium, Switzerland and Italy.

But Atradius said that the increase in the UK is forecast to be less than during the Great Recession in 2009.

It also said that the number of insolvencies will stay relatively high in 2021, but will decline one per cent against the total figure for 2020.

 

Source: channelweb


Restructuring experts prepare for fresh wave of UK company failures

The press are reporting that there will be an expected upsurge in insolvency appointments in the coming months.

Unfortunately, we feel that given the recent market conditions and the reductions in government support, that this will be inevitable.

As a practice we have been able to use the lockdown period to increase the size of our team and strengthen our working practices so we are well-equipped to deal with new and urgent matters.

We would encourage business owners to think carefully about their business structure, whether market conditions have changed and what they can do to adapt to those changes. If they are in financial difficulty, or they are unsure whether their business will still be profitable, we recommend they seek advice as early as possible.

If you or your clients are worried about your position or have been affected by the insolvency of a customer or supplier, we would be happy to discuss it with you. Please contact.

Source: Financial Times


Business Financial Distress UK

Co-operative Bank to cut 350 jobs

The Co-operative Bank has announced proposals to reduce 350 roles and the closure of 18 branches.

In a statement, the bank explained that aside from the specific branches affected, the reduction is expected to focus on middle management positions and head office roles.

The bank said that where possible, it will be looking to redeploy workers.

Co-operative Bank chief executive, Andrew Bester, said: “Unfortunately, we’re not immune to the impact of recent events, with the historically low base rate affecting the income of all banks and a period of prolonged economic uncertainty ahead, which means it’s important we reduce costs.

“At the same time, we are responding to the continuing shift of more and more customers choosing to bank online, with lower levels of transactions in branches, a trend which has been increasing for some time.

Bester added: “The bank is in a resilient position given the significant progress we’ve made in recent years, and our focus is on maintaining this as we continue to support our customers through the crisis.”

Source: Credit Strategy


STA Travel parent company files for insolvency

The Zurich-based parent company of student and youth travel specialist STA Travel is to appoint an external administrator.

STA Travel Holdings AG says “day to day“ operations in the UK are unaffected and that this process only affects the Swiss business.

STA Travel Holdings Switzerland says “consumer uncertainties” mean sales have not picked up and “the global magnitude of the pandemic crisis has brought the travel industry to a standstill, including STA Travel”.

The company says it expects “further restrictions and renewed lock-down measures” to continue into 2021.

STA Travel has 54 outlets in the UK with a focus on long haul “gap year” and adventure trips.

Many of its flights and holidays are ATOL protected and it is a member of ABTA. STA Travel Holdings AG says it “very much regrets to not have been able to secure the future of the business under these unprecedented circumstances”.

In a statement the STA Travel UK said: Following the decision to place STA Holdings, the parent company of STA Travel, into administration each division’s Country Manager and leadership team is now reviewing its own position.

"Further information will be confirmed as soon as finalised".

Source : itv.com


UK’s new insolvency process should worry company creditors around the world

Virgin Atlantic’s rescue deal is something of a watershed in how companies can escape insolvency.

Virgin Atlantic’s rescue deal is something of a watershed in how companies can escape insolvency. The deal, which will involve Richard Branson and US hedge fund Davidson Kempner Capital Management injecting US$1.6 billion (£1.2 billion) into the airline, uses the new restructuring plans made possible by the UK Corporate Insolvency and Governance Act 2020.

While most creditors have accepted the rescue deal, the approved restructuring plan will also bind those who are against it. The UK procedure has also been recognised by a court in New York so it protects Virgin’s American assets as well as its British ones.

The new Act is quite a shift from the old UK insolvency rules. There’s always the need to find a trade-off between protecting creditors and enabling business rescues, but the new rules mainly promote rescues, and there is little additional protection for disgruntled creditors. With the fallout from COVID-19 likely to lead to many more collapses, the implications are considerable. And, just like in the Virgin case, this looks set to affect creditors’ rights around the world.

Controversial insolvencies

In the UK, there have been significant controversies concerning the use of pre-packaged administrations (also known as pre-packs). Particularly popular in the early 2000s, pre-packs allow failed businesses to be sold to the best bidder using a pre-negotiated (“pre-packaged”) agreement between the debtor and the buyer.

Though pre-packs minimise costs, delays and negative publicity, they quickly became a way for distressed businesses to be sold for a pittance to a buyer connected to the debtor. The debtor’s shareholders retained control and the creditors (and taxpayers) received little or nothing.

The government tightened up the rules in 2015, requiring that businesses be properly marketed and introducing a pool of independent experts to guide creditors over whether a proposed sale was reasonable.

These changes largely worked, and pre-packs continue – such as the recent rescue of forex services group Travelex. But they don’t work where groups of creditors obstruct them, and practitioners have long lobbied for more instruments to rescue distressed businesses.

The traditional rescue route for companies is to enter administration and either do a deal with creditors known as a company voluntary arrangement (CVA), or get a court order known as a scheme of arrangement to impose the deal on any creditors unwilling to accept it. Both use lots of time and money, and come with strict rules.

The government had long promised reform, but the COVID-19 pandemic meant this could no longer be delayed. Among the new rules designed to facilitate rescue is the new restructuring plan procedure. Much to the approval of the industry, a rescue can now be imposed on dissenting creditors with a court order (known as a “cross-class cram-down”), provided that some conditions are met. Additionally, the rules around the level of creditor approval required for these plans to be permitted are more relaxed than for CVAs and schemes of arrangement.

The order of priority that applies in liquidation cases is not strictly binding in restructuring plans either. Normally creditors must be paid in ranking order – so that, for instance, mortgage holders are paid before trade creditors. Usually this means that lower-ranking creditors receive nothing, and that a higher-ranking class can block a debt repayment plan. Now it is easier to sidestep them.

Admittedly, courts must first be satisfied that dissenting creditors will be no worse off than with any alternative plan (normally a pre-pack). Yet UK courts have proved reluctant to question the judgement of those running the company, thus further limiting the creditors’ protection.

Restructuring plans can also be carried out by companies with the most tenuous connection with the UK (unlike CVAs, which require companies to be mainly focused on the UK or either registered here or in the European Economic Area). For the court to find a “sufficient connection” with the UK, it may even suffice that restructuring negotiations were carried out there.

Since Virgin Atlantic is a UK company, there is no such problem here, but recall that that deal has been recognised by a New York court. This is because both the US and UK have adopted the UNCITRAL Model Law on cross-border insolvency, which means they recognise insolvency procedures initiated in one another’s countries. Many other countries are also parties to this framework, so companies with little connection to the UK will probably be able to use the rules to protect themselves from creditors worldwide.

The problem with rescues

Giving companies more protection from creditors is not necessarily a bad thing, of course. If you rescue a company, you save jobs. But not always. A “rescued” company whose business is fundamentally broken is a “zombie” company, a sort of parasite in our economy. It may crowd out viable businesses, or push unpaid creditors over the edge. Also, the money lost by the government in failed rescues could be spent more usefully.

Take Debenhams’ restructuring saga. Debenhams was rescued in April, after sales plummeted under lockdown. The process is likely to result in a sale of its remaining profitable assets by the end of September.

But this is the third time in less than a year that Debenhams has gone through an insolvency procedure. During both previous attempts, suppliers and creditors went totally or partially unpaid. Debenhams also received state COVID support, for instance through the job retention scheme and the postponement of taxes that were due.

The retailer now continues as a going concern without fully paying landlords and suppliers – except essential ones – due to being in administration. And it is quite likely that more creditors will end up unpaid as a result of the latest rescue.

Should we turn the clock back to the good old days in which companies were liquidated and businessmen sent to prison for failing to pay their suppliers? Far from it. But the risks associated with restructuring plans seriously need to be discussed.

The government should introduce more stringent eligibility and approval criteria to ensure that only viable businesses are rescued. For example, restructuring plans could be made available only to companies heavily involved with the UK, and the additional voting requirements applicable to CVAs and schemes should be extended to the new restructuring plans. Unless we move quickly, we can expect a lot more zombie companies and distraught creditors in the months ahead.

Source: Australian times


Surge in Portsmouth firms filing for insolvency during lockdown, research finds

FIGURES have shown a huge surge in the number of businesses filing for insolvency compared to last year, with many firms kept afloat by government funding fear they will go insolvent coming out of lockdown.

Analysis conducted by the BBC’s Shared Data Unit shows around 5,000 companies have filed for insolvency since March, down compared with 6,500 last year, as government funding meant they went into effective hibernation.

In Portsmouth, 13 businesses filed for insolvency during lockdown between March 24 and June 30 compared to just six last year.

In Fareham seven did, compared to three last year, in Gosport two did compared to one, and in Havant eight did compared to just one last year.

Companies working in information and communication had seen the largest increase in insolvencies.

In separate research, Begbies Traynor said 527,000 businesses were in significant financial distress at the end of June and the true impact would only be seen in months to come.

Partner Julie Palmer said: ‘This crisis will force many zombie companies out of business. While these were clinging on to survival prior to the pandemic, many will now have become simply unviable due to high levels of debts and poor sales.’

This news comes despite the government spending around £160bn in support for businesses.

Economic support has ranged from loans to business rate relief, tax deferrals, top-up grants, a future fund for blue chip companies and the Bank of England issuing bonds to corporations.

However, it is not all doom and gloom, as the research also found a resurgence in new businesses being set up during lockdown, with around 180,000 companies registering in the UK from April to June.

In Portsmouth 408 new businesses were registered, 226 in Havant, 174 in Fareham and 78 in Gosport.

One of those was Sherlock’s, a bar in Clarendon Road, Southsea, which opened on July 4. It was set up by Richard Peckham and Debbie Moorhead.

Richard said: ‘All our friends and family thought we were a bit mad to set up a business right now but we felt that it was a good time as people were out of their normal habits. It has been really good so far.’

Richard also runs a marketing company called Portsmouth Flyers and Debbie is a hairdresser.

Richard said: ‘Both of those jobs came to a grinding halt during lockdown so it gave us six clear weeks to get the bar ready.’

Source: portsmouth.co.uk


Rules on insolvency ‘must be eased to prevent flood of bankruptcies’

Britain should prepare its courts for a flood of bankruptcies in the next few months and needs to liberalise its insolvency system to prevent viable businesses from going bust, a senior American economist and policymaker has warned.

Randall Kroszner, who sat on the Federal Reserve’s board of governors during the financial crisis, said that policymakers should take a pragmatic approach to corporate insolvency to protect jobs and to preserve as much economic value as possible.

He urged politicians to avoid being seduced by false hopes of a swift, V-shaped, recovery. “Of course politicians are reluctant to look to the negative,” he said. “Everybody wants a V and if you have a V you don’t have to worry about widespread bankruptcy and restructuring. But we have to acknowledge that this might be the case, so it’s important to be prepared for that and to minimise the damage.”

Governments around the world have begun to adapt insolvency laws to try to mitigate against the consequences of an expected surge in business failures. In March, Britain suspended laws on wrongful trading, allowing directors to keep technically insolvent companies open during the pandemic without fear of legal action. Under wrongful trading laws, directors can be sued for failing to wind up a company if it is running out of cash and facing insolvency.

Nevertheless, politicians and bankers are braced for a wave of business failures. Companies have borrowed billions of pounds through government-backed loans and economists are warning that many will collapse under of unsustainable debts if economic demand does not recover quickly enough.

Professor Kroszner, of the University of Chicago’s Booth School of Business, said that a relaxation of the insolvency rules could help to protect jobs and economic activity. “Given the number of bankruptcies are likely to go up quite significantly, it can be better for the economy and better for the debt-holders to not [wind down the business] and to do a restructuring that maintains employment,” he said.

“You won’t have the same liquidation and everyone being turned out of work. You can say, ‘OK, there’s a solid operation here with a high debt, so we want to restructure the debt burden but we want to maintain the underlying economic activity.’ That’s good for the economy, good for the workers and good for the bond-holders.”

He said that a good bankruptcy system was able to distinguish between unviable, or zombie, companies and those that would have survived were it not for Covid-19. Professor Kroszner, 58, drew on the example of Chapter 11 proceedings in the United States, which allow businesses to operate while paying creditors through a restructured payment plan and for directors to continue to run the business. Governments worldwide have borrowed from Chapter 11, but many of the benefits are available only in America.

In May, Chapter 11 proceedings in the US soared by 48 per cent, prompting bankruptcy experts to warn of potential delays in processing claims. They said that many viable businesses would be forced into liquidation prematurely if backlogs grew excessively. A group of academics wrote to Congress, urging policymakers to hire more clerks and to bring judges out of retirement.

Professor Kroszner said that British courts would face similar challenges. “Having a very effective and efficient bankruptcy, where you have expedited bankruptcies and sufficient resources in the legal system, is very important,” he said.

 

Source: Business Matters


The new corporate insolvency and governance bill: does it make moratorium better

In recent months, the UK accounting industry has become enamoured with talks of refining the moratorium process to generate a more debtor-friendly experience.

As businesses continue to recover from the recent pandemic and get their operations back on track, debtors have continuously urged the government to rework their moratorium process for favourable conditions. Amid talks of ease and revisions, however, lawmakers and accounting firms alike have also raised new questions over the practicality of a new mortarium because of practicality issues rooted in UK insolvency.

A new approach to the moratorium process

Recently, the government introduced the revised and debtor-favourable version of the moratorium process in the form of the Corporate Insolvency and Governance (CIG) bill.

With its recent release slated to be far more favourable for the terms and conditions that debtors seek in these times, insolvency practitioners have looked to the update as an effective means of balancing concerns out. Among the new additions that the CIG bill has brought about, however, the scope of the “monitor” position has been received with much concern as its structure poses a potential hindrance to the bill’s use.

Throughout what was considered by many practitioners as one of the quickest examples in history, the CIG bill was enacted in just a little over a month— but some say it may have been too soon. Now that the revisions are in effect, UK insolvency law is currently in the process of adjusting to different temporary and permanent changes that include a new moratorium process.

Generally speaking, the new process is distinguishable from past iterations because it allows firms in a distressed position or situation to review their financial health. This revision, in turn, yields a distinct form of board creditor protection from any legal implications during the process wherein a firm assesses the viability of their business and its chances of recovery.

How the new bill’s effects on moratorium may be a stepping stone to improvement

Regarding figures, the new moratorium revision seeks to provide companies in troubling finance waters around 20 working days worth of breathing space upon initial filing. This breathing room period, however, can also be extendable anywhere between an additional 20 working days or an entire year— which is primarily subject to the approval of creditors.

According to R3’s former president Duncan Swift, the former leader stated that “The moratorium is an opportunity for the company to assess the financial circumstances that it finds itself in.” The professional also cleared up that the new moratorium isn’t tied to a formal insolvency process— allowing more breathing room and flexibility for companies looking to assess their situation.

Additionally, Swift defended the new revisions and their effect on the practicality issues of UK insolvency: “This free-standing moratorium gives management more time to consider the options available and not to have ‘pre-decide’ whether to go in administration or into a company voluntary arrangements (CVA).”

A big-four take on the current revisions

In terms of a Big Four firm’s take on the new CIG bill update and its underlying moratorium revisions, KPMG’s global head of insolvency Blair Nimmo believes such an update is favourable.
According to Nimmo, the moratorium process provides another viable option that insolvency practitioners can utilise to save a business with potential from financial demise. Attesting the claim that this revision leaves room to manoeuvre, the global head of insolvency further expressed her favour of the CIG bill’s moratorium revision, stating:

“It would be horrendous for businesses to fail simply because they didn’t have a period to properly pursue different solutions, such as the sale or refinance of the businesses, whether it’s a [renegotiation] of a contract, or new creditors, etc. It would be bad if a perfectly viable business fell because of lack of time.”

Conclusion

As businesses continue to struggle with staying afloat amid the COVID-19 pandemic and are now forced to consider filing for insolvency, the new GIC bill seeks to provide a solution that works. With its renewed take on the moratorium process, the piece of legislation seeks to assist businesses as they get through this tough time.

If you’re looking for more accountancy news in the UK, visit our site today!

Source: Accountancy Today


Business Financial Distress UK

HS2 college at risk of insolvency seeks partner

The national college for HS2 is on the hunt for a provider to partner with following a grade four Ofsted report and warnings from the FE Commissioner it was facing “potential insolvency”.

The National College for Advanced Transport and Infrastructure (NCATI) told FE Week it was “working through a shortlisting process for a new partner” after it was late submitting financial statements for 2018-19.

A spokesperson said a new partner would “help us deliver the NCATI vision and improve quality”, and following the shortlisting process, NCATI plans to “embark on an open public consultation”.

He said they “remain confident” they will be able to “fulfil our ambition to train and upskill a broad and inclusive generation of talent from across the country”.

NCATI refused to go into more detail about what the partnership would mean for the future of the college, or who the potential partners are.

This isn’t the first time a troubled national college has had to partner with other providers. The National College Creative Industries (NCCI) partnered up with two local providers and then dissolved itself earlier this year, having swallowed a £600,000 bailout from the Department for Education to make it through 2017-18 as a “going concern”.

Access Creative College took over NCCI’s apprenticeships provision and South Essex College took over its classroom provision while NCCI restarted as a limited company.

NCATI, then known as the National College for High Speed Rail (NCHSR), took £4.55 million from the DfE to sign off its 2017-18 accounts.

NCHSR was opened in 2017 by then-education secretary Justine Greening with £40 million in capital funding from the Education and Skills Funding Agency to purchase equipment and construct facilities.

It became the National College for Advanced Transport and Infrastructure last October.

The college was engulfed in controversy at the start of 2020 when FE Week broke the news it had hired lawyers to stop a grade 4 Ofsted report from November being published, through a judicial review in the High Court.

NCATI eventually dropped its legal challenge at a cost of £73,000 and the report was released last February, revealing that employers were having to teach apprentices skills that were not covered by the college.

The FE Commissioner Richard Atkins intervened in the college in December, finding it would not be able to sign off its 2018-19 accounts as a going concern “without a commitment of 12 months of continued emergency funding”. He had instructed the board on how to operate while facing “potential insolvency”.

Atkins found NCATI had also based its 2019-20 budget on having 761 apprentices and 263 full-time learners, whereas in December 2019 it only had 216 apprentices and 94 other full-time students.

NCATI was placed in supervised status and since then has been undertaking a structure and prospects appraisal (SPA) with the commissioner.

To ensure this SPA process “is thorough and comprehensive”, NCATI agreed with ESFA to not file completed financial statements for 2018-19 until the culmination of the SPA, the spokesperson said.

A DfE-commissioned report published in February criticised how the national colleges were set up as standalone institutions, saying: “More detailed consideration could have been given to other models such as evolving new institutions from existing education and training providers”.

The report found NCATI had struggled with learner numbers due to delays in announcing HS2 contractors, which meant employers were unable to commit to the apprentice volumes they had originally anticipated.

Source: FE Week