SMEs and Covid loans – it’s time to repay…


Thousands of SMEs have had to take out government backed loans during COVID to enable their businesses to continue. Now some of these businesses find themselves unable to repay these loans due to lack of cashflow. Is there anything that these companies can do to ameliorate their position and continue to trade and what threats may they face from their lenders?

Tina Kyriakides, Barrister at Radcliffe Chambers

Tina Kyriakides, Barrister at Radcliffe Chambers

An initial step that a company might want to consider is to negotiate time to pay arrangements with its lender and any other relevant creditors. However, if this is not possible, then if the company’s underlying business is still viable, it should consider whether a restructuring of its debts is possible. This will involve seeking the advice and assistance of a licensed insolvency practitioner. Whilst the company considers the options available to it, it may also be able to secure a moratorium, which would prevent its creditors from taking any action during the period of the moratorium.

There are essentially two main ways that a company’s debts may be restructured. The first is by the company entering into a company voluntary arrangement under which the creditors agree to reschedule their debts and/or to accept a lesser amount and, which are subject to the supervision of an insolvency practitioner. The main types of voluntary arrangement are either: (i) an arrangement for a fixed period, say of five years, whereby the company continues to trade under the control of the directors and pays regular instalments from its trading income into the voluntary arrangement for the purposes of discharging the fees of the supervisor and a dividend to creditors; or (ii) an arrangement which enables assets to be sold and/or third party payments to be made into the arrangement from which the expenses of the arrangement and a dividend to creditors will be paid.

However, assuming that the figures work for a voluntary arrangement to be proposed, this route may prove not to be possible. One reason for this is that, in consulting with creditors, it may become apparent that the company will not achieve the 75% or more in value of creditors needed for the arrangement to be approved. Another reason may be because, in order for the arrangement to work, it would be essential to obtain the consent of a secured creditor, such as a lender, if it has a debenture over the company’s assets and undertaking, and/or the consent of a preferential creditor, such as HMRC, where it is proposed to alter their right to priority, and such consent is not forthcoming. Companies should also bear in mind that even if an arrangement is approved, it can subsequently be attacked by a disgruntled creditor on the grounds of material irregularity or unfair prejudice. Such attacks have happened in recent times in cases, for example, of retail restructurings, such as Debenhams, where creditors have been treated differently in the arrangement.

Another possible route for restructuring debt is via a restructuring plan under Part 26A of the Companies Act 2006, which again is a very flexible tool. Restructuring plans have some advantages which are not available to voluntary arrangements. First, they can bind secured and preferential creditors. Secondly, because voting is by classes of creditors, where classes are decided by commonality of interest determined by the legal rights to be released or varied under the plan or the new rights to be given, and because there are provisions, which enable a court, subject to complying with certain conditions, to exercise a cross class cram down in relation to classes of dissenting creditors, a company might be able to secure a restructuring of its debt through a restructuring plan even if it could not do so through a voluntary arrangement. The downside, however, of the restructuring plan route is that it must be sanctioned by the court and this involves two hearings. Expense will, therefore, be incurred not only in relation to the drafting of the plan and other documentation, but also in having representation at these hearings.

If debt restructuring is not possible, then a company may have to consider whether to put the company into administration or liquidation. However, a company may not have the luxury of considering the various options as it will be pre-empted by the actions of the lender. There are various options that a lender might take. If it is a secured lender, then it may appoint receivers or an administrator. Administration is also a possibility if the lender is unsecured and applies to the court for an order. The other option available to a lender is to apply for the winding-up of the company. This is currently not an attractive option, because of the Covid hurdle that must first be satisfied. At present, this additional hurdle is due to expire on 30 September 2021. The author is not currently aware of any intention to extend the date. As a result, it is likely that the number of winding-up petitions will increase substantially in the near future.

Tina Kyriakides, Barrister at Radcliffe Chambers


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