Updated as of 29 March 2020
The COVID-19 pandemic is putting unprecedented pressure on businesses and the situation is evolving rapidly. During this period of uncertainty it is, of course, important for directors to continue to monitor solvency – whether in the more critical immediate weeks or in the longer term. The situation does not mean that all directors will automatically be at risk of claims of breach of duties, wrongful trading or other challenges, which could arise should insolvency be a realistic prospect at this stage or indeed become an eventuality. On 28 March 2020, the UK Government announced the acceleration of certain insolvency reforms previously proposed by it following consultation on corporate governance and insolvency reforms.
These reforms are expected to be put before Parliament imminently and, when introduced, will provide comfort and breathing space to businesses affected by the COVID-19 pandemic. In particular, the UK Government has indicated the reforms will:
- temporarily suspend wrongful trading for a three-month period commencing 1 March 2020;
- introduce a moratorium for companies to prevent certain enforcement action being taken and assist with rescue and restructure strategies;
- introduce a new restructuring plan process; and
- amend the essential supply provisions contained within the Insolvency Act 1986 to ensure continuity of supply.
Draft legislation is awaited, however details of what was previously proposed can be found here.
In the meantime, and even if such legislation is introduced, prudent businesses should be taking a number of actions to mitigate risk. These include:
1. Communicating effectively with stakeholders. This is critical. Do not assume that others will know what you are doing during this period. It is important that Boards continue to meet and document what steps they are taking, the progress that is being made and any changes that need to be accounted for. Similarly, creditors, employees and others need to understand your outline plan. If you are going to require the cooperation of those parties over this period, engage with them now.
2. Considering the impact of any change in guidance or practices on an ongoing basis. In particular, consider whether planned transactions can still complete or what other challenges may arise in proceeding with those transactions. As at 27 March 2020, announcements have been made encouraging all but essential property transactions to be suspended. In Scotland, the Registers of Scotland closed the application record on 24 March 2020 with interim measures being put in place. We would urge you to engage with any advisers involved in these sorts of transactions.
3. Reassessing current financial models and identifying any viable financial rescue measures, including those announced by the UK and Scottish governments. Those measures that government has announced are not mutually exclusive. Some are available immediately without application, while others will require an application or specified steps to be taken. Such measures, together with the proposed insolvency reforms (if and when available), may well give you time to assess how your financial position may be improved and enable you to work on a revised business plan for the short to medium term. While acquiring additional debt as part of these measures may not be appropriate, seeking a capital repayment holiday, or investigating if there are any other informal arrangements that can be reached, whether with trade creditors or others, may work for the business.
4. Looking for opportunities to diversify services, simplify the business model or otherwise considering whether you can work smarter. Businesses should be looking at whether they can operate in a different way, or whether staff could be re-deployed to provide a different service. For example, does the business have any properties that are currently unoccupied? If so, could these be made available to provide an essential service, for example emergency accommodation for NHS staff who are required to self-isolate from their families? Consideration should also be given as to whether there are non-essential costs that can be taken out of the business now, or alternative supply arrangements that could be considered going forward.
5. Being wary of acting too quickly. Careful consideration needs to be given to the consequences. For example, avoid simply cancelling all direct debits to minimise financial exposure. By doing this, you could accidentally miss critical payments (insurance, for example), cut off access to vital supplies and precipitate a further crisis.
6. Considering carefully before offering vouchers and e-gifting. Businesses need to assess their longer-term future. If there is no realistic prospect of you being able to continue trading longer term (for example, if the business was suffering major financial stress before the COVID-19 crisis), taking such steps could simply be seen as worsening the creditor position and it may be that an insolvency process would be the more appropriate route.
7. Being patient – guidance is changing rapidly and additional measures are being introduced to support business and employees. Because of this, those responsible for rolling out measures will be under significant workload pressure. It may not be possible to obtain a decision on matters immediately. Continue to monitor the position and be prudent in day-to-day operations.
8. Engaging with advisers, whether legal, accounting or otherwise. Test your proposals, plans and options with your advisers and seek comfort from their experience and advice. Taking advice – perhaps inviting legal and/or financial advisers to join Board calls – will provide a layer of protection to directors managing this crisis. Seeking advice demonstrates the directors’ prudence and understanding of stakeholder interests in this rapidly evolving situation. We are happy to help from the smallest informal query to assisting you to build and deliver on a coping strategy for the weeks and months to come.
Allana Sweeney is a senior associate in Shepherd and Wedderburn’s restructuring and business advisory team. For more information, contact Allana on 0141 566 7215 or at email@example.com.