Take early advice to keep your financial options open

By Simon Martin, Ensors Chartered Accountants

With general inflation running at 9.4%* and fuel, energy and food prices rising much higher than that, there is increasing financial pressure on businesses and households alike.
Published in Essex Director magazine, Summer|Autumn 2022

Accountancy: Ensors Chartered Accountants

Add higher interest rates, repayment of Covid support loans, debt deferment, dealing with rent arrears, wage inflation and the uncertainty driven by the war in Ukraine, and there are very few businesses that are not seeing a rise in overhead, production and supply costs. All of which can bring about some form of financial distress.

The key in this scenario is to take early advice and ensure that all available options remain on the table, rather than taking advice at the last minute, when the only potential outcome at that point may be the cessation of trade and liquidation. Early advice is also essential to ensure that directors of businesses in financial distress, comply with their legal and fiduciary responsibilities and avoid the potential for personal liability.

If the signs of distress are identified early, and advice is taken at that point, then a range and hierarchy of options are available. It may be that some root and branch restructuring is required, together with new finance or additional investment, but the earlier on the distress curve that is identified, the easier solutions will be to implement.

Although many businesses in this situation are likely to be highly geared, there could well be a range of refinance options available. Clearly, the cost of this finance will correlate directly with the level of distress and the perceived risk. It must also be said that taking on increased debt at premium rates, with the likelihood that personal guarantees will be required, may not be the best solution.

Investigate softer options

Other ‘softer’ insolvency options could be considered, such as a Company Voluntary Arrangement, or the new Moratorium process, which both give a business protection from creditors, whilst a longer-term repayment plan is put in place. In both cases, the directors would retain control of the business whilst implementing the agreed plan.

Another fundamental ingredient of any solution relating to distressed businesses, is communication. Nothing has ever been gained by ignoring letters from HMRC or other creditors demanding payment.

HMRC is generally willing to enter into payment plans and has said that it wants businesses facing difficulty in dealing with debt, to communicate and at least make some sort of payment. HMRC adds that any business ignoring requests for payment, or building up arrears without any communication, will face recovery action. It will then be much more difficult to put a payment plan in place.

Many businesses will likely encounter some degree of financial distress in the short to medium term. Whilst not all of them will face the threat of insolvency, management information and internal controls must be available to identify the signs of distress at the earliest stage possible – and to then take advice about how the distress can be managed without it becoming terminal.

*Inflation rate correct at time of going to press

Take early advice to keep your financial options open 1

Simon Martin is Associate Partner of Ensors Chartered Accountants

T: 01473 220022
E: simon.martin@ensors.co.uk
Or visit www.ensors.co.uk

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