Using the tools right
Being part of the business and civic communities across Tayside for more years than I care to remember, this current worldwide health crisis has confirmed to me what I have known all along. The people of Tayside are resilient, honest and loyal.
The profound business and market interruption already caused by the COVID-19 (Coronavirus) outbreak has introduced insolvency risks for many otherwise healthy businesses.
In response to the crisis the Scottish Government and Scotland’s insolvency service (AiB) have put emergency measures in place that aim to ease the short-term burdens facing individuals and businesses as their cashflow takes a hit. The Coronavirus (Scotland) Bill gained royal assent on 6 April and is effective from 7 April 2020.
The changes around the extension of the moratorium period is welcomed as this is sympathetic to the short-term effects of coronavirus and the subsequent economic impact. An extended moratorium on debt enforcement – the current minimum period of six weeks has been extended to six months and the maximum limit of one moratorium period per year has been rescinded. The aim is to provide a period(s) of breathing space for individuals, partnerships, trusts, unincorporated bodies. Basically, those who are struggling to fulfil their debt payment obligations during the pandemic.
In addition to this change, we expect the UK Government to go further at some point later in April. They have issued proposals which will create breathing space for businesses in financial difficulty as a result of the pandemic. These are likely to include:
- A UK-wide moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure.
- Protection of their supplies to enable them to continue trading during the moratorium.
- A new restructuring plan, binding creditors to that plan.
The proposals will include key safeguards for creditors and suppliers to ensure they are paid while a solution is sought.
The government will also temporarily suspend the wrongful trading provisions to give company directors greater confidence to use their best endeavours to continue to trade during this pandemic, without the threat of personal liability should the company ultimately fall into insolvency.
When a company is solvent its directors owe their duties to the company, for the benefit of its shareholders as a whole.
When a company is insolvent or at serious risk of insolvency, its directors continue to owe existing duties, but their overriding duty will be to act in the best interests of the creditors of the company.
Prior to the coronavirus outbreak, when a company was insolvent and its directors knew (or ought reasonably to have concluded) that it would not avoid insolvent liquidation or administration, they were under a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors. Failing that, they risked personal liability for any worsening of the company’s position (known as wrongful trading).
A note of caution on directors’ responsibilities. It should be reiterated that existing laws for fraudulent trading and the threat of director disqualification remain and will continue to act as an effective deterrent against director misconduct during the pandemic.
It is important for directors to seek advice at an early stage.
Charting the course
Cash flow is one of the life preservers of your business and during a time when clients may be unable to pay, having a clear idea of how a reduction in income will affect your business is paramount. Information is key and now more than ever.
At Johnston Carmichael our specialist financial modelling team have developed a bespoke cash flow tool in response to the coronavirus crisis. It provides a detailed ‘200 day’ daily and weekly cash flow forecasting model that comes with a step-by-step training video. This is suitable for businesses of all sizes and has the flexibility to modify cash inflows and outflows on a day-to-day basis, as circumstances evolve.
Find out more about the tool and how government support will impact your plans over on our website.
Get in touch
Get in touch with me or your usual Johnston Carmichael contact to chat through your initial options.