Insolvency and Restructuring partner at Thrings, Melissa George, explores the issues directors should consider before taking a decision to continue trading, or stop, during the coronavirus pandemic.
What a week! We’re amidst a global crisis: one that none of us have seen, and hopefully will never see again. It is placing the most extraordinary physical, emotional and financial pressures on us all, and we are being asked to unite and adapt. Some businesses are thriving, whilst others are left feeling destitute.
A moment of relief for some came from the Government setting out a vast range of measures to support the economy. However, these measures are evolving daily and are, in many cases, in need of clarification. With such a fast-moving landscape, making decisions becomes difficult.
Directors have been left in a very real position, having to take action on the shape of trade, staffing (whether to retain, furlough, re-allocate), as well as consider the needs of the country, duties of care to staff (including vulnerable workers) and those around them, clients and business contacts. With the use of a crystal ball, they’re expected to understand the impact, cost and point at which the country will return to its (new) norm, and what this means for them.
To cap it all off, directors may still face risks of personal liability if they are later considered to have gotten it wrong.
What directors should remember
The law as regards the responsibilities of directors remains unchanged – albeit with moves to alter the rules in Australia and Germany afoot (the UK yet follow). For now, here are a few issues to consider when walking this tightrope. Please note: the following words are only intended as cursory guidance, given the huge amount of data directors are currently being asked to consume.
- The Companies Act 2006 imposes duties on directors to, amongst other things:
- Act in the best interests of the company (i.e. the business and its shareholders).
- When a company is insolvent (looking at its cashflow and/or balance sheet), act in the best interests of its creditors (not the company). With obvious impending cashflow difficulties, directors must be wary.
- Act in good faith.
- Promote the success of the business.
If these duties are breached, directors can face personal liability.
- The Insolvency Act 1986 requires directors to act responsibly when trading. Broadly speaking, if they should have come to realise that insolvency was inevitable, directors can be held liable to contribute to the company for any losses incurred thereafter – unless they have taken every step to minimise the loss to creditors.
What this means is that directors need to be on top of things and to take reasoned decisions. It does not mean that, as a matter of course, every business facing a risk of insolvency must commence insolvency proceedings. For some, that would itself cause avoidable loss. Regrettably, it may be inescapable for others. In the current circumstances, there could be an alternative solution: temporarily ceasing to trade.
What can directors do?
Directors should seek advice early, and work closely with their book keepers, financial controllers/finance directors, and can be assisted by accountants, insolvency practitioners and solicitors. Understanding cashflow and pinch points is critical. If deciding to continue to trade in difficult circumstances, we would recommend directors consider the following tips:
- Regularly hold meetings to reflect on big decisions and any further government guidelines – this is likely to be daily right now.
- Ensure all directors review financial information – delegation is not prudent.
- Document all critical decisions – even if you are a sole director.
- Prepare and review accurate management accounts (if you need professional help – get it). The accounts should:
- Map income and expenditure from prior trading, and forecast for at least 12 weeks or longer.
- Prepare scenarios around cashflow. Plan for 3-6 months of disruption based on mid- and the worst-case.
- Look at liabilities that continue to be incurred, asking: where can they be reduced?
- Assess the support available to you in the form of grants/breathing space.
- Assess whether you need a business interruption loan (if so when?). Apply early, as it may take time to come through.
- Most businesses will be affected and there may be opportunities around ‘mutual support for mutual survival’. Review your cashflow, considering available support, and discuss options with your supply chain, lenders, landlords and employees.
- Review the position daily, noting the exposure to creditors, government and professional advice, as well as the prospects of moving from the current predicament to improving trade, and ultimately (in due course) to profit.
- The position may continue to change quickly, so be agile and flexible.
This might feel a bit like 12 rounds in the ring with Rocky, but with proper training and prep, it might not yet be time to throw in the towel.
Be informed, be considered, be deliberate, and above all, BE SAFE.
To discuss the options for your business, please get in touch with a member of the Restructuring and Insolvency team.