As the the coronavirus crisis continues unabated in the UK and around the globe, primarily directors and to some extent other stakeholders, must remain vigilant and identify, manage and mitigate any impact and/or risk in their business, without neglecting their statutory rights. This article looks into the potential impact on companies; how to tackle/mitigate insolvency risk; and directors’ duties.
Business Impact of Coronavirus
In recent weeks the UK public has witnessed the downfall of UK based Flybe, the largest independent regional airline in Europe, the rapid fall of FTSE as well as the collapse of retailer Laura Ashely, all due to the outbreak of the coronavirus.
It is inevitable that more businesses will continue to face greater pressure due to the breakdown of international supply chains, disruption to manufacturing, cash flow issues and the challenge of what to do about staff costs. As these issues grow, so the insolvency risk for some companies becomes inevitable. When a company does not meet or is on the verge of not meeting its contractual obligations, the threat of a company becoming insolvent increases.
Dealing with a risk of insolvency because of corona virus
As the uncertainty caused by the coronavirus across the globe is rising, businesses should take into consideration the following matters in managing and/or mitigating possible insolvency risks:
• Check their contracts whether a default or insolvency event has (or could be) triggered
• Review whether force majeure clauses are in operation and the implications that may have for the business
• Monitor company’s balance sheet/cash flow
• Ensure future contracts include clauses to account for pandemics such as coronavirus
• Ongoing or pending litigation – check opponents’ solvency and consider applying for security for costs if necessary.
Directors Managing the Company through Insolvency
Directors will be called to make careful decisions on how to tackle the threat of coronavirus within their corporations. When putting into effect the UK government emergency legislation inside the company, directors should always consider their statutory obligation to promote the success of the company. This includes that the interests of certain classes such as the employees should be addressed.
If the continued solvency of a company looks doubtful, the focus of the duties of directors switches from promoting the success of the company to acting in the best interests of the creditors of the company as a whole, as equity value is eliminated. It is at this point that the potential for personal exposure becomes greater for company directors.
Therefore in the event of an inevitable insolvency, directors should take into account the following parameters when discharging their duties:
• Be transparent with creditors
• Take professional advice
• Maintain clear financial records
• Protect company assets
• Do not take out further credit
• Keep records of all meetings.
Redfern Legal LLP can help you deal manage and/or mitigate the risks of corona virus in your business. One of the members of our Corporate and Commercial team can assist you with any of the following:
• Advice on directors’ duties and potential liabilities
• Review and amend company contracts to cover future implications
• Review existing contractual obligation and how to mitigate risks
• Negotiation of financial arrangements
• Advice on employment law
• Advice on Insolvency and restructuring.