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Signs of Insolvency During COVID-19: Identifying Insolvency and Taking Steps to Avoid it

Coronavirus (COVID-19) is having a major impact on businesses in all sectors around the UK and many companies are facing insolvency. How do you spot signs of insolvency and what are the effects of the recently proposed changes to insolvency law and measures introduced by the UK government?

Identifying insolvency

Insolvency occurs when an organisation (or individual) has insufficient assets to pay its debts and can no longer meet financial obligations to creditors as debts become due. This state of financial distress can arise from various situations, such as poor cash management, a reduction in cash flow, or an increase in expenditure.

There are various ways of ?testing? for insolvency under the Insolvency Act 1986 (IA 1986). A company is deemed to be insolvent if it is unable to pay its debts as they fall due (cash flow insolvency). In addition a company is also deemed to be unable to pay its debts if it is proved that the value of the company?s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (balance sheet insolvency).

Companies also need to keep an eye on their debt to equity ratio. The more debt a company has, the closer it may be to insolvency, explain the experts from Moore Barlow LLP.

Other warning signs of insolvency for a company are creditors threatening or taking legal action, such as a County Court Judgement (CCJ), a statutory demand or issuing a winding-up petition.

Directors can be held liable if a company continues to trade while it is insolvent. Specifically, directors face personal liability for what is known as ?wrongful trading? if:

They knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.

They did not take ?every step with a view to minimising the potential loss to the company?s creditors?.

Personal liability runs from the point the director knew the company was insolvent. Further sanctions include disqualification from being a director, fines or even imprisonment.

New measures

On 28 March 2020, the Business Secretary declared it was the government\-\-s intention to suspend wrongful trading provisions and to introduce a moratorium for businesses undergoing a restructuring process. It is unlikely that there will be any changes in relation to the more serious offence of fraudulent trading, for which directors are likely to remain personally liable.

Businesses should give careful consideration to the deployment and use of government coronavirus schemes such as the job retention scheme, VAT deferment for 3 months, deferred self-assessment payments, business rate holidays or applying for business interruption loans in an effort to combat the onset of insolvency.

For further information please contact:

David Foster, Partner, Dispute Resolution, Moore Barlow, Guildford, Surrey, UK

Daniel Baker, Associate, Dispute Resolution, Moore Barlow, Guildford, Surrey, UK

Ecovis is a leading global consulting firm with its origins in Continental Europe. It has almost 8,500 people operating in nearly 80 countries. Its consulting focus and core competencies lie in the areas of tax consultation, accounting, auditing and legal advice.

The particular strength of Ecovis is the combination of personal advice at a local level with the general expertise of an international and interdisciplinary network of professionals. Every Ecovis office can rely on qualified specialists in the back offices as well as on the specific industrial or national know-how of all the Ecovis experts worldwide. This diversified expertise provides clients with effective support, especially in the fields of international transactions and investments – from preparation in the client\-\-s home country to support in the target country.

In its consulting work Ecovis concentrates mainly on mid-sized firms. Both nationally and internationally, its one-stop-shop concept ensures all-round support in legal, fiscal, managerial and administrative issues.

The name Ecovis, a combination of the terms economy and vision, expresses both its international character and its focus on the future and growth.

Posted by on 15. July 2020. Filed under Internet. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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