What does this mean and what is the practical application for UK company directors?
I have significant experience as a turnaround investor and company operator navigating the practical side of insolvency laws, which are incredibly complex.
Whilst the new announcements are significant, and potentially far-reaching, the practicalities of successfully implementing a company rescue are far from simple.
Firstly, the detail is limited on the proposed changes at this stage but the broad guidance from the government is summarised as follows;
‘Under the plans, the UK’s Insolvency Framework will add new restructuring tools including:
a 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 suppliers to enable them to continue trading during the moratorium; and
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 emergency, without the threat of personal liability should the company ultimately fall into insolvency.
Existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct.’
As the COVID-19 pandemic has initiated unforeseen stress for a huge number of companies, it is vital that directors do not become consumed by day-to-day crisis management as the possibility of becoming a passenger in your own business is even more pronounced. In practical terms, what this means is addressing problems head-on and making difficult decisions, not burying your head and hoping the problem will go away, because it won’t.
In addition to this, with widespread panic across the market, it is likely that companies run the risk of losing control very quickly in the event that creditors turn on companies, and director level engagement is not proactive. Whilst winding up petitions may not be heard by the courts until the summer there are still issues by nature of the existence of the petition which businesses need to be aware of.
From personal experience I have set out below my views on the most important aspects of managing a crisis and how to engage with the world of insolvency practitioners.
1) Early engagement. This is probably the one area that everyone can agree on. In such a high proportion of cases directors reach out for help when it is too late. This starts with engagement with lenders, then shareholders (if applicable) and finally IP’s. In reality, directors enter a death spiral by not getting ahead of events, rendering the situation unresolvable and the company helpless.
2) Trusted Advisors. Speak to someone you can trust as early as possible who can rationally explain the new rules of engagement. i.e. you technically work for creditors and not your shareholders at a point in time when the company is deemed insolvent. With the right advisor you will be able to comfidently have the conversations with stakeholders that are needed without the fear of the unknown.
3) Don’t be scared. Right and Wrong are actually quite simple, regardless of all of the insolvency jargon which will be thrown at you. Don’t pay yourself ahead of creditors. Don’t prefer one creditor over another. And don’t do anything that you wouldn’t be able to defend in your creditors eyes, or stand behind in the future. One must try to take at least an hour a day to strategically think about the business as opposed to being consumed by the chaos at all times. Don’t be scared to go bust. I have seen countless businesses which emerge from a crisis by putting their homes on the line, only to make the situation a whole lot worse in 6 month’s time. i.e. don’t just do things to buy time – make decisions that rescue the business, but this is sometimes not possible.
4) Write minutes. If things do go wrong you are going to be asked for your written records over and over again in an environment supercharged with suspicion. In insolvency you are not treated as 'innocent until proven guilty'. I guarantee you from personal experience that having the ability to produce written records of your decision making, as you navigated the crisis, will save you weeks of your life if you do end up in an insolvency. I appreciate that this is easy for large companies with boards and legions of professional advisors but, even emails sent to yourself as a note in time as to why you paid a particular creditor, or sold an asset will make your life so much easier should rescue not be possible.
In the UK there is a highly negative sentiment around ‘going bust’ which is not the same in many other countries e.g. the US. My personal view there is that there is no shame in insolvency. Things go wrong in all walks of life and business is no different. One could name hundreds of now famous, and revered entrepreneurs, who have gone on to great success who have suffered insolvencies at points in their careers.
Oliver Hutley
SpringRock works in a range of turnaround situations where new capital is required, providing hands-on operational and financial support. We also advise underperforming businesses, identifying problems and quickly improving performance.
We recognise that speed of response is critical, and we will look to undertake the majority of our due diligence in-house, with minimal reliance on external advice. This means we can transact in accelerated time frames and help your business reach its full potential.