Insolvency fears - a problem for many companies
John Highfield

Member Article

Companies warned - be prepared to repay Covid support loans

AS Britain emerges from the Covid-19 pandemic businesses are facing a new challenge…paying back the loans that kept them afloat as the country steered its way through lockdown.

Banks handed out more than £75 billion to more than a million companies under a number of emergency support schemes set up by Chancellor Rishi Sunak and backed by the taxpayer.

Businesses that took advantage of the support packages were granted an interest-free period of a year but some of the country’s biggest banks - including HSBC, NatWest, Barclays and Lloyds - have now started to issue warnings that loan repayment will be expected soon.

And hundreds of extra banking staff are now being prepared to launch recovery efforts and collect billions of pounds in crisis loan repayments.

Adrian Graham, of Sheffield insolvency and business turnaround company Graywoods, says that despite the warnings, some companies are not fully prepared for the financial hit that repayment could bring.

And he has warned that a full investigation of any proposed repayment plan should be carried out before entering that sort of agreement.

“In the current climate, whilst lenders are working with companies, agreeing a repayment plan initially appears to be an attractive option for directors,” Adrian said.

“But many directors are entering Time to Pay arrangements and Bounce Back Loan repayment plans without a realistic blueprint as to how they will continue to meet repayments in the future.

“They should ask themselves whether they have overcommitted and entered into an agreement that the company will be unable to afford and they must be mindful of the consequences of failing to make the payments agreed in their Time to Pay Arrangement.”

HMRC have suggested that they will begin issuing winding up petitions against companies, that default on their agreed tax payments, when restrictions on issuing petitions is lifted on 30 June 2021.

At the same time, banks have said that they could use tough tactics to secure bounce back loan repayments.

And only recently the Court of Appeal ruled that although banks have a duty of care when providing a loan, they do not have a duty of care in the recovery process.

“In fulfilling a repayment plan, directors should ensure that their company is able to make payments to other creditors as they fall due, particularly when many businesses are unable to trade at full capacity due to restrictions,” Adrian explained.

Directors should also be acutely aware of how they take remuneration, the level of remuneration and the correct use of a dividend in these uncertain times because incurring additional liabilities or incorrect remuneration could lead to a director’s actions being called into question.

“Despite the difficulties facing many companies right now, directors still owe a series of duties to the company’s stakeholders when carrying out their functions.

“If a company finds itself in a position where they cannot pay their liabilities, directors will need to justify their decisions.

“Consequently, directors should be wary of committing to decisions that breach their fiduciary duty and lead to allegations of misfeasance or preferencing.

“In addition, the temporary suspension of wrongful trading provisions does not absolve a director from their legal responsibilities when running a company.”

Adrian added that to avoid their company entering formal insolvency proceedings, directors should first ensure that they have reassessed and prepared business models and operations for a ‘post COVID’ world.

“We advise that directors work closely with accountants or another suitable professional when preparing a realistic cash flow forecast or making management decisions prior to entering any repayment agreement,” he said.

“Professional assistance will help to support and evidence a director’s decision making process if examined.”

This was posted in Bdaily's Members' News section by John Highfield .

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