The impact of COVID-19 on the economy is likely to be long-lasting. The UK economy contracted by 2% in the first quarter of 2020 and analysts expect the figure to be worse for the second quarter as lockdown continues.

The Scottish and UK Government’s financial support measures have been a massive lifeline to businesses, enabling them to continue and providing the opportunity to come out of lockdown with hope for the future. Even with this support many businesses will struggle to survive and there are a number of issues and options that these businesses should be considering.

Directors’ duties

It is important to be fully aware of your directors’ duties and obligations. If it looks like your business may struggle to meet its liabilities as they fall due then you have a duty to act in the best interests of the creditors.

The Government announced a temporary relaxation of wrongful trading laws from March 1, 2020 as part of their COVID-19 support measures. This was designed to allow directors to take advantage of the various loan schemes available despite the severe and immediate impact of lockdown on cashflow.

You still are obliged to minimise any potential losses to your creditors and treat them all equally and wrongful trading rules will apply if your company was potentially insolvent prior to 01 March, 2020. To protect yourself and reduce the risk of any personal liability, you should seek professional advice as early as possible.

Creditor action

While our experience is that most creditors are not taking recovery action currently, creditor action will recommence as courts begin to fully reopen because cash will be needed to fund and sustain their resumption plans.

We recommend that you review your liabilities and identify any that may prove troublesome. It is an ideal opportunity to communicate with major creditors now and see what can be agreed to help ease any pressure.

Business rescue options

Unfortunately, this crisis will prove terminal for some companies, but there are plenty of rescue options available for struggling, though viable, businesses that need a helping hand to adjust to the ‘new normal’ post-lockdown. These include:

• Restructure/reorganisation
• Refinancing/investment
• Business Debt Arrangement Scheme – this is a statutory debt management tool introduced by the Scottish Government to help partnerships, trusts or unincorporated bodies to repay their creditors. A Business DAS can last up to five years and freezes all future charges and interest on the debts being repaid.
• The new ‘breathing space’ restructuring tool – this is currently being introduced by the Government and is expected to give companies a moratorium on creditor action while they implement a recovery plan.
• Company Voluntary Arrangement (CVA) – this is a legally binding agreement with creditors which allows a proportion of the company’s liabilities to be repaid over time. A CVA requires the approval of 75% of the creditors but it is a very flexible restructuring tool that can be adapted to the specific circumstances of the company involved and allows them to continue to trade and the directors to remain in place while reporting to the appointed CVA Supervisor.
• Administration – the first objective of the administration process is the rescue of the company as a going concern. In the right circumstances, administration can be a quick and effective business rescue tool that can benefit both the company and creditors.

The key is to get professional advice from an insolvency practitioner as early as possible. The quicker any rescue measures are implemented the more effective they are likely to be, leaving you ready and able to deal with the challenges ahead.

• Read all of our articles relating to COVID-19 here.