Issues to Consider if You Close Your Business Down...
Following the announcement from the Chancellor yesterday to provide further support for businesses by extending the repayment terms of BBL and CBILS loans from 6 years to 10 years, many businesses are still going to struggle over the next 6 months. The furlough scheme comes to an end on 31 Oct and the new Job Support Scheme is not as a generous and will leave many businesses wondering how they are going to pay the bills. Even now I’m having clients ask me what the repercussions are if the company is closed and there are some important considerations that business owners need to consider.
I have been trying to get some advice from experts in the banking and insolvency sectors to help me understand how the banks will react when businesses are unable to pay back the loan repayments or close the business down leaving the debt to the bank unpaid and uncollectable. I have spoken to one of the new high street banks and they were unable to comment on exactly their view but were quick to mention that all the banks are looking to create a joint debt collection agency so to prevent reputational damage as they try and recover the loans handed out during the coronavirus crisis. He also made another valid point that it would be much harder for directors to obtain credit in the future if the loans were not repaid as any credit agencies would show that the director was involved in a company that had been liquidated.
My next port of call was to speak to a well-known insolvency practitioner and to see if they had first-hand experience dealing with any companies that have been liquidated owing the banks the loans and what the fall out for the directors would be. The good news is that he hasn’t dealt with any yet but there have been lots of enquiries and to quote his words “it’s only a matter of time before the flood gates open”. We had a discussion over the role of a liquidator in these circumstances and he said nothing has changed and they will still look into the conduct of the directors prior to the company being insolvent to ensure they have not preferred paying themselves ahead of other creditors being HMRC, suppliers and the bank. He also made a valid point that any sensible repayment of directors' loans at the normal levels of repayments would not cause any issues.
There was one point of the conversation that made me stand up and think and that was in respect of paying dividends when the company is in trouble and does not have sufficient profits. As you are most probably aware dividends can only be paid if the company has profits from previous years that it has not distributed or out of current year's profits. As paying dividends to directors/shareholders is still tax efficient this is still normal practice, however if these payments continue whilst the company is insolvent and the company is consequently liquidated the liquidator will look to the directors/shareholders for these dividends to be repaid which could cause huge amounts of stress for the business owner. To avoid this problem the business owner should look to pay themselves a salary rather than a dividend if the company is likely to be insolvent soon. Hopefully, the business will trade through these difficult times and dividends can be re-started later, however it will protect the business owner if the company does not survive. The only caveat is that the salary should be commensurate with the work being done and should be at a market rate for the work done.
As a result of my conversation with the insolvency practitioner every business owner should be looking at the levels of dividends being paid to ensure there are sufficient profits in the business to sustain the payments, prepare profit and cashflow forecasts so you know if the dividend structure needs to change and the extra PAYE that will need to be paid each month and most importantly speak to your accountant so you are aware of the issues you will face if you have no choice but to close the business down. With the right support and guidance, it is not as bad as it might first appear, and it could give you some clarity over your future.
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