Commentary

A8.105 Insolvency and coronavirus (COVID-19)

Administration and compliance

A8.105 Insolvency and coronavirus (COVID-19)

Other impacts of coronavirus on businesses

A8.105 Insolvency and coronavirus (COVID-19)

Businesses have attracted a great deal of support from the Government in response to the coronavirus (COVID-19) crisis. However, even the Chancellor has admitted that not every business will survive these difficult times. Many businesses are facing a real risk of insolvency, and they either need to adapt quickly to survive or face the real prospect of closure.

What is insolvency?

Where a company cannot pay what is owes, or when the value of its assets is less than its liabilities (ie when it has a negative balance sheet), then it is technically insolvent.

The economic impact of the coronavirus crisis means that the value of real assets has been significantly impacted. At the same time, many businesses are facing cash flow problems that mean that they cannot pay their creditors, and some are even forced to enter into more debt by applying for loans. A drop in asset value compounded with an increase in liabilities means that otherwise healthy businesses are suddenly plunged into a technically insolvent position.

Having a negative balance sheet does not automatically mean that formal insolvency proceedings must begin, but facing up to the problem sooner rather later can help avoid a worse position than if nothing is done.

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