It is clear from the increasing measures that individuals and businesses are having to take in response to the coronavirus outbreak that there are potentially serious financial implications for organisations as a result.
On 17 March 2020, the Chancellor unveiled a £350 billion support package for the economy, with the government delivering a clear message that it will do “whatever it takes” to shore up the economy.
The support to businesses includes:
• £330 billion in government backed loans to assist with payments of rent, salaries, to suppliers or for stock
• £20 billion in other aid, including funding grants of between £10,000 and £25,000 for small businesses
• Business rates holiday for all firms in the hospitality sector in addition to the rates relief announced in the Budget
• Grants for retailers and pubs
• Additional help for airlines and airports is being considered
These measures will provide breathing space for businesses who may have seen revenue and future income streams plummet, but much of what is being offered is a credit facility which will need to be repaid.
The measures have been welcomed, with the British Retail Consortium saying these measures are “a welcome and necessary first step”. It remains to be seen whether short term assistance can alleviate business leaders’ concerns about the long term impact of the economic disruption.
In an already challenging economic time, and notwithstanding the government’s measures, this disruption may mean that may businesses in many sectors may need to consider some form of restructuring in the future.
Sectors where there are particular risks include:
Travel and tourism sector - just today the FCO has advised against all non-essential travel. Many airlines have cancelled flights to mitigate the lack of people travelling.
IAG (owner of British Airways) has said it planned to cut capacity by at least 75% in April and May in an attempt to ensure the airline does not have to enter into an insolvency process. The lack of flights available will no doubt have an impact on hotels and other tourism related businesses.
Retail – with people being advised to avoid crowded areas shopping centres are likely to struggle. Coupled with the growing trend of online shopping we anticipate that many more high street brands may require some restructuring.
As well as the retailers themselves, landlords of retail units face further uncertainty. Intu Properties plc (owner of multiple shopping centres within the UK) announced earlier this month that they have doubts about its survival unless it can raise additional funds. While the government announced certain business rates suspensions, it is unclear whether this will be enough for an already troubled sector.
SME business – the government anticipates that one-fifth of employees will not be able to go to work at some stage over the coming weeks. This is likely to put pressure on businesses to meet supply deadlines due to employee sickness or self-isolation.
This will have a knock on impact on other businesses – for example in an attempt to ensure their supply chain remains strong Morrisons have announced that all suppliers with a turnover of up to £1m will be paid immediately in an attempt to mitigation any unnecessary cash flow issues.
Businesses will need to consider the impact of the COVID-19 related disruption and adapt and change to deal with it. As well as accessing the government support to which they may be entitled, some businesses will need to consider what cost saving measures they can put in place. This might include assessing their own credit control procedures, negotiating extending payment terms, or considering alternative suppliers.
Some businesses will need to go beyond this and consider redundancies, negotiations with lenders and creditors and possible re-financing.
For some, more formal restructuring may be required. Early recognition that this may be required generally means a greater number of available options.
It is inevitable that some businesses will not survive the financial disruption and will end up in an insolvency process. Generally speaking, the later advice is sought in response to disruption, the fewer the available options, meaning that an insolvency process such as administration or liquidation may be required.
Directors will need to keep a close eye on the company’s financial status and cash flow. At any stage when there are concerns about the long term viability of the business, directors will need to ensure all key decisions are made with the interests of creditors in mind.
Directors will need to appropriately consider their duties when managing financial situations to ensure that they are not subsequently held personally responsible for any loss to creditors.
Advice should be sought early if there are concerns about steps that should be taken especially in respect of transactions that could be challenged at a later date if there is a subsequent insolvency process.
Ashfords are able to assist businesses of all size and in all sectors as they adapt to the current challenges.
Our Restructuring and insolvency team regularly advise businesses of all sizes in all sectors on restructuring, as well as business owners and directors on their duties and obligations.
If you require assistance from the team, please contact the Restructuring and Insolvency team.
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