Although things are starting to show signs of changing, we are still living in uncertain times. Most of us will have colleagues on furlough, hopefully due to return shortly. Most will also have considered, if not obtained, a loan or grant under the government's Covid-19 austerity measures. However, the stark reality is that many businesses will not survive these challenges.
Although the Covid lockdown is unprecedented when it comes to insolvency tests and measures the position remains the same as it always has been. Insolvency is tested either on a book basis - where the company's assets value is measured against the company's debts - or on a cash flow basis - where the company's ability to pay an invoice as it falls due is tested. If you are a director, although the government has temporarily paused the legislative "trading whilst insolvent" prohibitions, you still need to make sure that your company stays on the right side of both of these tests. Practically speaking, the Covid lockdown has seen cash flow seize up. However, the lockdown is not a legitimate reason for not paying debts as they fall due.
You can and should take steps to protect against these issues:
- Have a 12 week cashflow statement prepared, and review it regularly.
- If your company has problems paying an invoice, speak to your creditors about payment terms before it becomes an issue.
- Speak to your Gilson Gray adviser or your accountant about protecting your business. Just getting external professional advice helps you as a director comply with your duties.
The "head in the sand" approach is dangerous, never more so in these unprecedented and most challenging of times. Get good advice early. It might just save your business.
Originally published June 15, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
