Business advice for companies suffering from coronavirus measures
Clearly, we are in very unusual times, but one certainty is that disruption will be caused to all businesses, large or small, as the impact of the coronavirus starts to take serious effect.
Directors of businesses are subject to numerous duties to the company and its shareholders, both statutory and under common law. All directors need to be aware of these during the day to day operation of the business.
However, if directors become aware that their business is starting to suffer, as a result of coronavirus or any other circumstances, they need to consider whether they may be heading towards an insolvency situation, i.e. the company is unable to pay is debts as they fall due. In such a situation, there is a very important change to the nature of the duties of a director, and the interests of the company’s creditors must be considered as a priority. Whenever a director feels the company is in any form of distress, early advice is strongly advised, many businesses can be restructured or traded out of difficult situations with the right professional support but leave it too long and insolvency may be the only route. In addition, directors can become personally liable if they trade in certain situations when the company is insolvent, so good, early advice is critical.
Clearly, it is a very difficult period for a director How can they really know what is in the best interests of the company’s creditors? There is a very difficult balance between continuing to trade, and potentially turning the situation around so all creditors are paid in full and the business can continue. That must be contrasted with continuing to rack up company debt, and increasing liability to creditors, with no real prospect of turning matters around, hence significantly weakening the position for creditors and shareholders. Taking professional advice at an early stage does provide significant protection for directors in deciding which path to take.
There are several important factors to consider when a director is concerned about the viability of their business. Should they make redundancies, which will save costs but make the business, potentially, less effective? Should they take on new orders if there are concerns about how they are paid for, even if customers are placing orders from the company? Should new premises be taken on, further debt be entered into, investment be considered etc, all which could help the business get out of difficulty but could also place it into further debt from which it cannot recover. One very important decision is when debts/payments are made. Agreeing deferred payment terms, and delaying certain payments, may be against the directors’ business instincts but may be required in times of difficulty. It is also a good time to talk to your bank. Keeping them in the dark in difficult times may not be the best course of action, and some form of re-financing, particularly in the current environment, may be available.
Do also review your contracts very carefully if the contract is or maybe affected by the coronavirus pandemic. This is not a subject for this blog but if there is a force majeure clause you may be able to get out, or minimise the impact, of your contractual obligations. Equally, you may be able to rely on the legal concept of “frustration”, though this is only applicable in reasonably limited circumstances.
Ultimately, some form of insolvency may be required, but professional advisers are more interested in saving a business, and the employees that go with it, than winding it up – when all parties concerned, including creditors, lose out.
Clearly, any period where a company is distressed is challenging and difficult for all directors involved, but we can help in the process of making those tough decisions and work with you to ensure you have the right professional support around you. Please do not hesitate to contact us if you have any concerns regarding your business and any other impact coronavirus may have caused to your company.
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It is a difficult time for businesses and individuals alike. If you have concerns about your business, contracts or obligations in the current climate, we can advise you. Do not hesitate to contact our Corporate and Commercial team on 01895 207264 or at firstname.lastname@example.org
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