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    There is no vaccine available to protect against the long term effects of Covid-19 on business owners

    As the mass roll out of vaccinations brings the possible end to the Covid-19 pandemic nearer, the true extent of the financial impact on Business will start to become clearer in the coming months.

    But what about the owners of the SME businesses, the backbone of the economy?

    Directors, whose pre-pandemic businesses were ticking along nicely, have suddenly seen their business world change overnight, with many Owner Managers having to take personal financial risks to ensure they still have a business on the other side.

    Personal Guarantees for Corporate Borrowings

    Many Directors are finding themselves having to borrow for the first time and that can bring with it new personal guarantee exposure to financial institutions.

    Other Directors may have already guaranteed secured and unsecured borrowing from peer-to-peer lenders and banks pre-pandemic and are now facing further exposure if their business is struggling to pay.

    While the Government has stepped in during the pandemic with Government backed loans which are free of personal guarantees up to certain limits, there is still guarantee exposure for borrowing above those limits.

    There is also the matter of recent legislative changes whereby HMRC have regained their preferential creditor status on certain crown debt which came into effect in December 2020 see our earlier article. This could also have a serious impact on personal guarantee exposure where funders have been supported by Floating Charge debentures. 

    This issue is further amplified at the moment as many businesses will shortly be dealing with the requirement to repay VAT previously postponed in the Spring of 2020.

    Business Owners Financially Supporting Their Own Businesses

    There will be many instances where business owners have lent personal funds to their companies, either to top up Government support or because those loans could not be accessed.  Little thought, however, may have been given as to how those loans might be repaid or whether the loans should have been covered by a Debenture in favour of the Director / Shareholder as a lender to the business.

    The financial position of the business may be precarious for some time to come and if there is a risk of a formal insolvency in the short or medium term, any repayment of that financial support could well come under scrutiny by any subsequent liquidator.  Repayment of loans, in full or in part, could result in litigation against Directors by a liquidator.

    At Poppleton & Appleby, we have long been advocates of putting debentures in place to secure significant loans from a business owner to their business. 

    A debenture may not guarantee getting all of the money back, but it will give certain priority rights for distributions in the event of an insolvency and can also provide a degree of control over any insolvency process.

    Directors Risks and Exposure for failed businesses

    Temporary legislation has been put in place to provide a degree of protection for Directors of businesses that fail as a result of Covid-19.  That protection is only temporary and it is unclear at the moment what the landscape will look like in the next year or so when the actions of Directors of failed businesses come under scrutiny.

    No Director should feel comfortable or complacent about their handling of business affairs at the moment.  While there is significant forbearance and understanding at the current time, accusations of  misfeasance, preferences and transactions at an under value are still very much live issues.

    We are now beginning to see the first wave of failed businesses that have taken the financial support on offer during the pandemic and with that the first accusations of the abuse of that financial support. 

    Claims of fraudulent furlough applications, misuse of Bounce Back Loans and Coronavirus Business Interruption Loan funds will invariably start to increase.

    Our message to your clients who have any concerns is simple:

    Get Advice and don’t leave it too late

    Should any of your clients have concerns, whether it is financial exposure stemming from personal guarantees or the issues surrounding the repayment of loans to their business, they should always speak with you in the first instance.

    Should they have concerns about their financial stability and viability, and how decisions they are making now might be viewed if the business subsequently fails, then they should continue to seek specific advice from you, but also other outside specialists.

    Our team at Poppleton & Appleby is on hand to support you and your clients in these specialist areas,  should you wish to discuss any client matters or simply chat around the issues we have raised here, feel free to contact Matt, Andy or any of the team at Poppleton & Appleby.

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