The climate of giving and forbearance is ending and the challenges for many SMEs are only just starting.
Whilst government support measures may have protected businesses during the pandemic, we are now seeing the end of these measures. Many SMEs who took advantage of government backed loans are now having to face the prospect of being unable to repay them. Is there anything that they can do to save their businesses?
The course that a company takes will depend upon how viable its underlying business is and the attitude of its creditors. If the business is viable, then it might be possible for the company to restructure its debts. This can be done in one of three ways. First, the company might be able to reach a consensual agreement with its creditors or those creditors that are pressing for payment. Secondly, it might be able to do a company voluntary arrangement under the Insolvency Act 1986 if there is a real prospect that the company will be able to trade out of its difficulties and contribute part of its trading income over a fixed period of time (usually five years) towards paying a dividend to its creditors, or if it has assets that can be sold or there is a third party willing to make a capital payment into the arrangement, so that a dividend can be paid, or a combination of both. Company voluntary arrangements, however, are not always possible, for example, because the necessary 75% majority will not be obtained or the consent of a secured creditor to the arrangement is required and the secured creditor is not willing to provide it. In such circumstances, it might still be possible for the company’s debts to be restructured via a restructuring plan under Part 26A of the Companies Act 2006. Whilst such plans need the sanction of the court and the upfront costs are higher than voluntary arrangements, they have the advantage that secured creditors can be bound by the plan and voting takes place by way of separate classes. If, therefore, one or more classes approve the plan, the court may, depending on the circumstances, exercise its powers to approve a plan even though there are one or more classes of dissenting creditors.
Administration or liquidation are the next likely steps, in the event that a debt restructuring is not a feasible option. However, a creditor may take this decision out of the company’s hands by itself seeking administration or liquidation. In the case of liquidation, save for debts payable under business leases, this process has now become much easier and, as a result, it is likely that the number of winding-up petitions will increase.
The new year is, therefore, likely to be a crunch year for some SMEs who, having managed to survive through various government packages, now find themselves exposed to the real world once more.