With general inflation running at 7% and fuel, energy and food prices rising much higher than that, there is increasing financial pressure on businesses and households alike. Add into that mix rising interest rates, re-payment of Covid support loans, debt deferment, dealing with rent arrears, wage inflation and the uncertainty driven by the war in Ukraine, there are very few businesses that are not seeing a rise in overhead cost, production cost and supply cost and therefore, facing some form of financial distress.
The key in this scenario is to take early advice and ensure that all available options remain on the table, rather than taking advice at the last minute, when the only potential outcome at that point may be a cessation of trade and liquidation. Early advice is also essential to ensure that directors of businesses in financial distress, comply with their legal and fiduciary responsibilities and avoid the potential for personal liability.
If the signs of distress are identified early and advice is taken at that point, then there are a range and hierarchy of options available. It may be that some root and branch restructuring is required together with new finance or additional investment, but the earlier on the distress curve that is identified, the easier solutions will be to implement.
Although many businesses in this situation are likely to be highly geared, there could well be a range of re-finance options available although clearly the cost of this finance will correlate directly with the level of distress and the
perceived risk. It also needs to be said that taking on increased debt at premium rates with the likelihood that personal guarantees will be required, may not be the best solution.
Other ‘softer’ insolvency options could be considered such as a Company Voluntary Arrangement, or the new Moratorium process which both give a business protection from creditors, whilst a longer-term repayment plan
is put in place. In both cases the directors would retain control of the business whilst implementing the agreed plan.
Another fundamental ingredient of any solution in relation to distressed businesses is communication. Nothing has ever been gained by ignoring letters from HMRC or other creditors demanding payment. HMRC are generally willing to enter into payment plans currently and have openly said that they want businesses that are facing difficulty in dealing with debt, to communicate with them and at least make some sort of payment. They have
equally said that any business that ignores requests for payment, or builds up arrears without any communication with HMRC, will be faced with recovery action and it will then be much more difficult to put a payment plan
in place.
It is likely that very many businesses will encounter some degree of financial distress in the short to medium term currently. Whilst not all of these businesses are going to face the threat of insolvency, it is vital that management information and internal controls are available, to identify the signs of distress at the earliest stage possible and to
then take advice as to how the distress can be managed without it becoming terminal.
