Does the post lockdown business world fulfil your business wishes?

We now have the government’s road out of lockdown and business owners impacted by the lockdowns will be thinking about how the easing of restrictions will work for their businesses.  There is optimism but also uncertainty about how long social distancing will last, whether by law or social norm.

For some business owners the pandemic has been so disruptive and the recovery is still so uncertain that they will be considering whether to persevere on or to close the business.  This is a business decision as to whether the rewards of staying in business are worthwhile on a personal basis and deciding not to carry on is not defeat.

This article provides an overview of some of the factors impacting a closure decision which directors might consider when deciding whether to continue or not.  We hope to pen a follow up article with experienced lawyers in a few weeks to provide some legal tips on safely closing a business.

If you are considering closing your business rather than re-opening after the lockdown this needs some planning and the first question that you should ask is: is my company solvent or insolvent?

In a typical situation, the company has not traded for many months but has some cash reserves.  There are no trade creditors and the rent and taxes are up to date.  The wind down seems logical.

It is important that all potential liabilities are considered before steps are taken to implement a wind down strategy.  An assessment should be made of the likely costs and whether the company has sufficient funds to discharge them.  These might include:

• Redundancy costs / payments in lieu of notice;
• Settlement with a landlord to exit a lease which could include future rent payments and dilapidations;
• Termination costs in relation to ongoing service contracts or asset leases.

It is useful to discuss these costs with an experienced restructuring professional so that the liabilities can be mitigated as much as possible.

It should be noted that if the plan is to close the company then the furlough scheme should not be used while all staff are working their notice periods.

Solvent outcome

If it is clear that the company has sufficient funds to meet all the debts and costs then redundancies can be made and negotiations can commence with the landlord and other parties to agree settlements.  Care must be taken when making employees redundant to follow government guidelines on consultation.

If further reserves remain which are available to the shareholders, then you may consider whether it will be tax efficient to implement a Members Voluntary Liquidation.

Insolvent outcome

If there is doubt as to whether all payments can be made, then consideration should be given as to whether an insolvent liquidation – a Creditors Voluntary Liquidation – is the most appropriate course of action.  This is a process where a Liquidator is appointed and he or she deals with the assets of the company to ensure that any returns to creditors are paid in accordance with rules set out in the UK insolvency framework.

Putting your company into an insolvency process may feel like a failure but it should not be regarded as such where external factors such as the pandemic have had such an impact.

Employees who are made redundant by an insolvent company will be given the opportunity to claim monies owed to them from a government agency who will make payments subject to statutory limits.  The government then claim in the liquidation in place of the employees.

When the decision to wind down the company has been made, the decision to pay ongoing liabilities can get difficult.  If the directors choose to pay certain creditors in priority to others, then the directors may potentially face personal claims against them when a Liquidator is subsequently appointed.  It is understandable that there may be various factors which would lead a director to wish to pay certain liabilities before others and that conflict is a good reason to leave the decisions to a liquidator acting in the interests of all creditors.

Sale of the business

In either scenario, an alternative to closing down might be to seek a buyer for the company’s business.  This might save jobs and some of the termination costs from being incurred (eg redundancy costs) and therefore, even where the sale consideration might be only nominal, it may create a solvent outcome for the shareholders.

Conclusion

It is understandable that some business owners may be pessimistic about future trading conditions and may wish to take this opportunity to pursue a new challenge rather than re-opening their business.  In the present circumstances it is inevitable that some companies will not survive.

Directors should ensure that, if closure becomes inevitable, they seek timely advice to ensure that they make the right choices.

At Kreston Reeves, we will provide straightforward and clear advice whilst retaining an open mind about the possible options available for you. If you’d like to discuss the topics explored in this email then please get in touch with us.