The Covid-19 pandemic poses a monumental challenge for UK businesses. No sector will be immune from cashflow difficulties caused by reduced demand, delayed supplies and from the knock-on effects of their customers facing financial difficulties.
Much will now depend on how long the restrictions remain in place. Many businesses will be able to survive a few weeks; a couple of months could cause serious difficulties. Encouragingly, the Government is showing it understands the extent of the problem, and the Chancellor’s announcement on 20 March of an unprecedented support package will be helpful in giving businesses a chance to survive and giving employees the prospect of keeping their jobs.
Directors will be concerned about whether their businesses can survive the coming weeks and months, and will understandably be worried about their duties and their own personal liability. We have set out below some practical steps to help Directors navigate through some very difficult decisions.
Forward planning is absolutely essential. Directors should prepare trading and cashflow forecasts and keep these under regular review.
Communication with stakeholders is key. This includes employees, customers and suppliers, who should be kept informed on the steps being taken where ‘business as usual’ is no longer practicable.
It is important to maintain a dialogue with lenders, especially where an increase in facilities is required or loan repayments will be missed. Banks have been tasked by Government to play their part in providing working capital to business, and will be able to assist in accessing Government schemes.
Directors should keep the financial position of the business under regular review and should obtain professional advice where they are uncertain on their duties or on the right course of action.
Directors will be required to make some difficult decisions which they may not have faced before. For example, Directors may be faced with the question as to whether the company should incur new credit from suppliers where there is no certainty that, if the restrictions persist for a protracted period, the company will be able to survive. The key here is for Directors to be satisfied that there is a ‘reasonable prospect’ of avoiding insolvency and to record the decision and the reasoning in writing.
Where Directors have serious concerns about the survival of their company, they should bear in mind that where their company is insolvent (or likely to be insolvent), they are required to act in the best interests of creditors.
It will often be the case that the interests of creditors are best served by the company continuing to trade under the control of its Directors. The fact that in the current environment, there are unlikely to be buyers of businesses, means that the interests of creditors may well not be best served by appointing administrators to try to sell the business as a going concern.
In continuing to trade, the key concept is that directors should believe there is a reasonable prospect of avoiding insolvent administration or liquidation.
It is important that the Government has signalled it will do whatever it takes to minimise the economic fallout and to preserve jobs. In the light of the ongoing discussions between Government, lenders and others about supporting companies through the crisis, Directors will be able to seek to rely on this when considering whether there is a ‘reasonable prospect’ of avoiding an insolvency at the current time. Clearly, this should be kept under continual review, and Directors should record their discussions and reasons for continuing to trade in board minutes or memos.
Directors should also bear in mind the availability of the Company Voluntary Arrangement (CVA) procedure to give them the breathing space to get back on top of matters and keep their business running. Alternatively, it should be possible to negotiate individual arrangements with large creditors outside a formal insolvency procedure.
For more information, please email us at firstname.lastname@example.org or speak to your regular CVR Global contact. Alternatively call us on 0203 794 8750.
To download our COVID-19 Practical Steps for Directors brochure – click here