Navigating the corridor of uncertainty for your business: How to make the most of the extended ban on winding up petitions

It probably didn’t come as much of a surprise to many that the government has again extended the temporary provisions in the Corporate Governance and Insolvency (CIG) Act, this time until 30 June. Aimed at protecting businesses struggling as a result of the measures introduced to combat COVID-19, these clauses:

• Restrict creditor rights to pursue debts through statutory demands and winding-up petitions, as well as remove the potential for directors to be held personally liable for wrongful trading.
• Prohibit the enforcement of termination clauses by suppliers, with the exception of small suppliers.
• Relax the entry requirements to the new moratorium procedure, as well as providing for certain temporary rules for the moratorium.

This news will be a welcome continued reprieve for directors struggling to make ends meet and still working through what their business’ place in a new post-COVID-Brexit world will look like.

It is of little debate that, for many businesses, this is the hardest twelve months that they have ever been through. Whilst corporate insolvency stats are currently low, it must be in the back (or even forefront!) of any responsible director’s mind as to how the new debt they have taken on in order to survive this pandemic will be able to be re-paid and how they can get those revenue streams back up to normal.

It is important that directors realise that they are not alone in this, and that many businesses are thinking the exact same thing. And, even more importantly, that help is out there and is available from professionals who are experts in dealing with debt, cost efficiency measures (as painful as they may be) and restructuring.

The government’s announcement, combined with the roadmap out of lockdown, provides the perfect opportunity for directors to seek professional advice and to devise a plan for how liabilities will be managed once businesses are able to open, and to do so in a calm environment free of the type of creditor pressure that can lead to rash and unnecessary actions. Howzat for a gift horse?

Plan for your planning

What this plan will look like will be different for every business and a good adviser should be able to assist you with a plan that works for you specifically. If you are thinking about seeking advice, then make it easier (and cheaper!) for yourself by having your stumps set up with the bails neatly perched on top as much as practically possible before your first meeting. Having the right information to hand and in the back of your mind, will make it much easier for both you and your adviser to tailor-make a plan that is going to work properly and straight off the bat (maybe with some tweaks to cover and silly mid-off, if I mix my cricket metaphors) for your business.

As a starting point, try to get rid of any pre-conceptions and old perspectives in your mind and make sure that you are aware of where your business currently stands, not how it was in February 2020 or even last December, when we all thought we’d be going home for Christmas.

Management info and models

Accurate and effective management information is an important part of this, as is having a cash-flow that shows you where your pressure points are in real-time. Both of these will be integral to formulating a roadmap to revenue (howzat that for a catchphrase!) that is going to be realistic and workable. They’ll also help you in the meantime whilst you’re sorting out this roadmap – cash is king at the moment and being able to keep track of it (how much you have, how it’s going to be used, when it’s looking tight and crunchy etc) will go a long way towards ensuring that your business is still around to implement that roadmap once the prohibition on winding up petitions is lifted.

Just on this point, remember that cash-flows don’t have to be huge complex monsters that cover off every single source of revenue or cost that needs to be paid on a line-by-line basis. They can be as detailed (or not detailed) as you need them to be. Too often we see clients who have overcomplicated these to the point where you cannot easily see the information that is needed. For reference, I cannot imagine that Joe Root has a plan in his mind for exactly how every ball, in every over, for an entire five-day test match should go and if he can still win matches, so can you. Just make sure they are telling you what you need to know, and when you need to know it.

The same applies for any revenue models that you may have. Makes these simple, but accurate and do not overcomplicate with too many different scenarios. Further, whilst you may have these cemented in your mind, until you see them on paper, it can at times be difficult to glean the information that they provide and turn it into something useful (e.g. a cliff edge is coming in May). It is also particularly hard for any adviser to see these and so severely limits their ability to help in this regard. I.e. Write it down.

Know your own debts

Try to also gain a solid understanding of your debtor and creditor days, as well as what your bad debts are looking like so that you can work through these. With these ratios cemented in your mind (or on the back of that pesky piece of paper your revenue model is on), you can work through these (with your adviser if necessary) to adjust where you need to make sure these are working for your business.

Monitoring these on a weekly basis and keeping an eye on your ratios will mean that you can recognise and plan for when fluctuations are occurring (if they are regular) and you can feed this into your cash-flow to increase its sensitivity and accuracy. If your ratios are not looking right, or suddenly start to do a leg-spin at certain times of the year, then review your lists to see who the culprits are so that you incorporate a plan for how to deal with them into your roadmap.

Keep it simple

If all of this sounds a bit like overkill, then (whilst I’ll still encourage you to do it, if you can) take some time out to consider just two or three measures that you believe to be the most representative of how your business is performing and get some stats together on how these have been working over the past year, and how you would like them to work in the future. To deal with two things at the same time (or to take a wicket maiden if I persist with my cricket theme), once you’ve got these in place then, even as you’re still figuring out your RtoR (Roadmap to Revenue), review them on a fortnightly or even weekly basis as a barometer for the wider business performance as you go along. Getting into the habit of this will undoubtedly help in the long run once the pitch opens up to normal performance and means you can continue to tweak that carefully thought-out roadmap as you progress through it.

Current liabilities

It’s important to remember that, whilst these restrictions are in place and your business is protected from suddenly ending up in court facing a winding up petition, these will not last forever. So, whatever else you do, and however much that RtoR is taking up your time and energy, do not use this as an opportunity to just stop talking to your lenders and other creditors.

If you are at all worried about meeting your own liabilities on time, then open communication lines early and keep them open. Be transparent with where you are at and let them know that you are taking advice and that a plan is in place for how you will be managing your debt. Debtors with open, trusting relationships with their lenders will often receive a greater degree of forbearance than those who have been refusing to communicate or, even worse, telling them a different version of the truth. And, even with the best roadmap in the world, the situation that many businesses are likely to find themselves in may mean that forbearance, even if it is only short-term, is necessary if they are to survive.

Last over

Most SME businesses will not need anything lengthy or overly complicated in order to see themselves through the next few bumpy months, but they will need something that works for them. Having considered all of the above, and with it clear in your mind, means that you will be well prepared. If you’re considering a formal debt restructuring, then I would strongly advise that you speak to an adviser.

On this note and as I finish up, it’s important you find an adviser that is right for you and your business, that really understands your needs and where you want to go. As with any type of transaction, but particularly where a business is feeling those touches of distress, value for money is incredibly important so make sure that you’re working with an adviser you can trust.

If you would like to discuss any of the topics explored in this article. Contact Caitlin Powell.