Manufacturing and production output have been hugely affected by the ongoing coronavirus pandemic. A truly global industry, manufacturing was one of the first sectors to witness first-hand the unprecedented levels of business disruption which was to come as the virus made its way to our shores.
With production in China at a standstill in January 2020, as the pandemic intensified in the Far East, manufacturers in the UK soon started experiencing operational issues as the global supply chain was bottlenecked. As the virus has continued its rampage across the globe, manufacturers in the UK are facing huge uncertainty as they battle against a multitude of challenges.
A slowing and uncertain economy makes for falling demand as consumers put the brakes on purchases; all the while manufacturers are also contending with operational challenges when it comes to sourcing components and raw materials, as well as ensuring workers are doing so in a safe environment. As many manufacturing jobs simply cannot be carried out remotely, production has had to be slowed down in order to safely accommodate staff on site and prevent localized outbreaks of the virus amongst workers.
Implementing additional safety measures to ensure the site, factory, or plant is COVID-secure, not only poses logistical challenges, but also comes with a financial cost attached. Enhanced PPE, sanitiser stations, as well as revised rotas and depleted numbers on site, all add up during a time where revenue is falling.
This has led to many manufacturing businesses to suffer a huge drop in cash flow, at the same time as facing the uncertainty not only as to when the industry will recover, but also how much worse the situation will get before embarking upon a recovery strategy is even possible.
If your manufacturing business is struggling with operational disruption or a tightening of cash flow due to the COVID-19 pandemic, you may be considering whether the business has a future. Depending on how bad your company’s financial problems have become and how viable you seen the business being over the long-term, there may be the chance that placing the company into liquidation is the most appropriate step to take.
Placing your manufacturing company into liquidation is a huge decision to take, and you must make sure you are fully aware what this entails and what it means for yourself, your employees, and your creditors. If your company is insolvent, however, it is absolutely vital you seek advice on liquidation even if this is something you are not keen on doing. This is because once you know your company to be insolvent, you have certain responsibilities and obligations to your company’s creditors; failing to adhere to these can lead to serious consequences further down the line.
A licensed insolvency practitioner will be able to discuss your options with you including explaining the alternatives to liquidation if your business is deemed to be viable and suitable for a rescue and recovery process. They will also give you the advice you need to ensure you adhere to your legal duties as the director of an insolvent company.
If you decide that the best option for your manufacturing business is to place it into a formal liquidation procedure, this will achieved through a Creditors’ Voluntary Liquidation – or CVL. As a formal insolvency process, a CVL can only be entered into under the guidance of a licensed insolvency practitioner. Once you appoint the insolvency practitioner, they will take control of settling the company’s outstanding affairs, including dealing with creditors on your behalf.
All company assets will be identified before being valued and sold, with the proceeds being distributed amongst outstanding creditors according to a designated hierarchy. The company will then be formally wound up and at the end of the process it will cease to exist as a legal entity. Any remaining company debt at this point will be written off unless you have provided a personal guarantee – or PG – for this borrowing. If you have, then the PG will crystalise at this point, and responsibility for repaying the debt will shift from the company to you as an individual.
Insolvent liquidation is unlikely to be something you want to happen to your company, however, in some instances it is the most appropriate option for all concerned. Employees will be made redundant, allowing them to claim redundancy if eligible, while all creditors will also be dealt with fairly and in accordance with the Insolvency Act 1986.
The manufacturing industry has suffered more than some due to its inability to transfer operations to a ‘home working’ environment. While many companies have been able to continue trading effectively with workplace restrictions due to the ability to allow staff to work from home, the manufacturing industry – for the main – does not have this luxury.
While this has undoubtedly meant output has suffered, the silver lining is that the government’s Coronavirus Job Retention Scheme (CJRS) has allowed manufacturers to furlough a portion of their workforce while factories and plants were working at a lower capacity. This scheme has been extended until 31st March 2021, providing owners of manufacturing companies and their employees an element of security for the short-term.
With liquidity and capital resources under pressure, some manufacturing companies may find it beneficial to take out a loan in order to ease immediate cash flow worries. As a response to the COVID-19 pandemic, the government introduced a range of measures to assist companies during these challenging times, and one of these initiatives was a number of government-backed loans.
These loans come in two main forms: the Bounce Back Loan scheme or, for larger businesses, the Coronavirus Business Interruption Loan Scheme (CBILS). Both schemes offer eligible companies a government-backed loan with a range of competitive terms. Loans can be taken over 10 years, they are interest-free for the first 12 months, and no security or personal guarantee needs to be provided by the company directors or shareholders.
If you are in the market for an emergency loan to tide your manufacturing company over until supply chain and operational issues have improved, a CBILS or Bounce Back Loan is highly likely to be the most appealing way of accessing these funds.
If, however, you have uncertainty about the future viability of your manufacturing company, taking out additional borrowing particularly if your company is already heavily indebted, is only likely to make the problem worse and simply serve to prolong the inevitable. In this instance you should make it a priority to enlist the help of a licensed insolvency practitioner who will be able to talk you through your options, and advice whether any proposed funding is likely to improve your situation or just move the problem down the road.
Graeme’s manufacturing company specialized in furniture, homeware, and decorative accessories, selling direct to the end consumer.
The company adopted the make-to-stock (MTS) strategy which predicts the levels of goods needed based on expected consumer demand. This strategy worked well and allowed the company to ship their products almost immediately after the customer placed their order; something which was a huge selling point and something which set the company apart from its competitors.
When the COVID-19 pandemic hit, the fact that the company was already holding surplus stock meant orders could still be fulfilled even when the supply chain – which involved component parts being shipped from China - was disrupted at the start of 2020. However, this soon caught up with the company as stock levels were rapidly depleted and the supply chain remained bottlenecked. Graeme had to increase his lead times to customers; this resulted in lower sales and significantly affected the cash reserves of the company.
By the time the supply chain started to become replenished, the UK was in the grip of a national lockdown. Demand for homewares and furniture increased massively as more people were spending increasing amounts of time at home, as well as many needing to furnish home office spaces. Unfortunately, Graeme was not able to capitalise on this surging demand. Social distancing measures limited the amount of staff working on the floor at any one time, while cash flow problems were also preventing the company from acquiring the stock it needed.
After discussions with a Real Business Rescue insolvent practitioner, it was determined that the company was viable, but it would need an injection of cash to bridge the gap caused by supply chain disruption earlier in the year. A flexible commercial loan was arranged which allowed Graeme to purchase more stock to keep up with consumer demand. Although there are still limits on staff numbers which is preventing the company from operating at full capacity, Graeme is still able to take advantage of the soaring demand for his products with the company’s improved liquidity.
If you are in the position where your manufacturing company is unable to operate at capacity, or you are battling against the logistical challenges of providing a COVID-safe environment; you may have reached the decision that you no longer wish to carry on running the business. Depending on your manufacturing processes, your sub-sector, and the desirability of your company, there may be a chance that you could sell it on the open market.
A sale could be made to an interested investor, a connected party, or even a competitor looking to expand their market share or geographical coverage. At this stage, however, who you may sell your company to is less important than determining if the company is actually desirable as an acquisition opportunity.
Much of this will depend on its current, past, and projected future financial performance, as well as it’s specialism, workforce, and asset value. It must be stressed that not every manufacturing company will be sellable, and in an uncertain economic climate, achieving a sale is even more difficult; however, if you are able to achieve a sale, this could allow you to leave your company behind while also enjoying the proceeds.
If you are serious about selling your manufacturing business, employing an expert to help you navigate the process could not only help mitigate the stress involved, but could also help accelerate the process, allowing you to complete the transaction in a timely manner. At Real Business Rescue we have a specialist corporate finance team who can help you navigate the selling process every step of the way.
We will be here from start to finish, from arranging an independently valuation of your manufacturing business, marketing the business for sale both on the open market and also through our network of investor contacts, right through to negotiating the deal and ensuring swift completion of the transaction.
If the business is not saleable, however, yet you are not keen on liquidating the company, your insolvency practitioner will be able to talk you through the range of business rescue and recovery options available which could help you turn around the fortunes of your manufacturing company and put it back on the road to profitability.
Even if your manufacturing company is currently experiencing problems, it does not necessarily mean that the business is beyond rescue. In fact there are a number of ways to save your manufacturing company, particularly if the business was performing well prior to the COVID-19 pandemic and associated disruption to both operations and supply chain management.
If you are wanting to explore your options, a licensed insolvency practitioner is perfectly placed to help you understand the various solutions that exist, as well as advising you which option is the most appropriate for your company.
Turning around a failing business requires a depth of insight from the insolvency practitioner as to what caused the problems in the first place and the likelihood of the company returning to a viable and profitable position, as well as a commitment and desire on behalf of the company’s directors and shareholders to turn the situation around.
The first step is to get to the root of the problem and plan a solution from there. If your problems are down to a drop off in demand which is unlikely to return, there may be no realistic chance of turning the company around; if, however, financial concerns can be traced back to a period of supply chain disruption or lack of payment from debtors, restructuring options can be explored.
If you are struggling to manage your cash flow due to your invoices being paid late, or not in full, accessing a form of invoice financing could be what is needed to steady the ship. Alternatively, we can help you explore other funding options such as commercial loans or asset finance, thanks to our dedicated commercial finance team
For many manufacturing companies, however, the problems will go beyond this. If you have fallen behind in your obligations to HMRC, have accrued a significant amount of debt, or cannot cover your outgoings as and when they fall due, entering into negotiations with your outstanding creditors could be a solution.
You may be able to agree to pay your HMRC arrears through a series of monthly installments by arranging a Time to Pay (TTP) agreement. As long as your company has a good track record of paying its tax on time and in full, and you can demonstrate your ability to clear your arrears in 12 months, HMRC are often willing to give you this additional period to bring your account up to date.
However, if you owe money to a number of creditors, a formal and legally-binding insolvency solution known as a Company Voluntary Arrangement (CVA) may be more suitable. A CVA is entered into by an indebted company and its creditors, and typically lasts between 3-5 years. During this time the company must pay a fixed amount each month to the appointed insolvency practitioner (acting as nominee and supervisor for the CVA), who will then distribute this money to creditors according to a previously agreed ratio.
This monthly payment will be less than what was being paid prior to the CVA, however, creditors do also often benefit from a CVA as the likely alternative would have been the company being forced into liquidation where financial returns would typically be much less. Creditors (at least 75% by value) must agree to the CVA before it can be implemented, however, once consent has been given, the CVA becomes legally-binding on all parties.
If creditor pressure has got too much and you are being threatened with legal action, placing your manufacturing company into administration may be required. This process protects the company from threats of litigation as well as pausing any current legal proceedings. The company’s administrator, who must be a licensed insolvency practitioner, will use this time to devise a workable long-term plan which may involve internal restructuring, a sale of the company, or even liquidation if rescue is not seen to be possible.
When a company enters an insolvent liquidation process, one of the outcomes is that all staff are made redundant. As long as these employees have worked for the company for at least two years, they are able to make a claim for redundancy. What many people don’t realise, however, is that company directors are also often likely to be eligible for redundancy too.
If you are the director of your manufacturing company and it becomes insolvent and subsequently enters a liquidation process such as a CVL, just like your employees you may be able to claim redundancy. You will need to satisfy a certain criterion in order to be eligible for director redundancy, which includes having at least two years’ service, working for at least 16 hours per week, as well as taking a regular salary through PAYE.
The amount you may be entitled to will depend on a number of factors such as your age, your length of service, and the salary you were paid by the company during this time.
As part of the liquidation process, your appointed insolvency practitioner will be able to refer you to a fully regulated claims management firm who can help qualify your entitlement to claim.
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