COVID-19 | Minimising financial risk to business

1:30
Welcome to today's webinar the latest in our series on the impacts of the coronavirus on your business this afternoon. I look at minimizing Financial Risk to business. I'm Sean Moran a partner in the restructuring and insolvency team here at Shakespeare Martineau.
1:49
You will see on your screen that you're able to ask questions. So, please do raise these along the way and I can answer as many as I can at the end. The coronavirus pandemic is having a devastating effect on individuals and businesses across the globe for companies in this country.
2:05
The outbreak comes against a background of concerns across all sectors caused by uncertainty surrounding brexit and the risk of a no deal at the end of this year as well as a General downturn in markets across the world The immediate effect of the outbreak has been A disruption to supply chains with a lack of availability or delays to supplies where supplies are sourced from the Far East and just-in-time deliveries are critical for some sectors such as retail or Automotive. The consequences are already having a major impact on trading projections for the first two quarters of 2020 and Beyond.
2:49
Many businesses have found themselves unprepared for this situation without appropriate contingency plans to deal with major disruption events.
3:00
It is important to realize that this does not just affect companies who do business with China the spread of the pandemic around the world has led to restrictions on the movement of people which presents challenges to all businesses these restrictions of cause further problems for struggling operators in specific sectors already facing trading difficulties in particular the travel and Leisure sector.
3:25
The recent demise of Airline flybe shows how quickly an adverse situation can develop with widespread disruption leading to a cessation of trading and the appointment of Administrators to the company.
3:42
Restrictions on public Gatherings by many European governments with the UK shorter follow shortly or mean that restaurants hotels and other businesses in the Leisure sector will continue to struggle with the less robust being forced to fold even buoyant businesses with strong order book and secure Supply chains. May face challenges as a result of the virus.
4:09
Companies do have a duty to ensure the health and safety of their employees and many are now being forced to adapt working patterns, which may lead to a loss or reduction of production causing further strains on the balance sheet.
4:25
Against this background directors must be increasingly aware of their duties and responsibilities with a heightened risk of insolvency for many businesses. So what are the immediate steps directors should take to minimize risk to their business? Well first it's important to note that directors have a duty under the companies act to promote the success of a company for the benefit of its shareholders.
4:51
But when a company is faced with challenges to its operations placing it in an insolvent position those duties change and the interests of the companies creditors become Paramount.
5:04
Perhaps the most fundamental fundamental thing to bear in mind is that directors must have the availability of relevant financial information directors should ensure that they have access to management accounts for the company on a regular basis.
5:24
This will enable them to make key decisions on a properly informed basis for the benefit of the company and its creditors directors should also ensure that the company does not continue trading when there is no realistic Prospect of avoiding a formal insolvency process.
5:44
The particular risk here in terms of ongoing trading would be claims against the directors by a liquidator for wrongful Trading.
5:54
Now a claim for wrongful trading if successfully proved could result in the directors having to make significant compensation payments to the company acting by its Liquidator.
6:09
where a company is in financial distress directors should take particular care to avoid entering into transactions which involves specific dispositions of a company's assets any transfer of an asset at less than its full value or any payment made exclusively to a specific creditor where other creditors are excluded from payments may be subject to a challenge by Liquidator or an administrator if the company Subsequently goes into a formal insolvency procedure. This could lead to a transaction being set aside and potentially action being taken against the director or directors personally to compensate the company.
6:55
It is important that the board of directors meets on a regular basis. So the important judgment calls can be made and that the directors ensure that all decisions made at these meetings are carefully minuted to create a paper trail.
7:13
Where appropriate the board should take professional advice.
7:17
Specifically before entering into any significant transactions, which may later be set aside.
7:24
Or in connection with continuing the company's operations bearing in mind the risk of a later claim for wrongful Trading.
7:34
So what steps are there that you can take to protect your business? But it's important that directors engage early with key stakeholders in particular the company's Bankers who may have the right to appoint administrators if they hold a debenture and there is a breach of the terms of that debenture.
7:57
Or it may be specific creditors of the company who provide key supplies.
8:03
And place the company at risk by present presenting a winding up petition in the event of non-payment.
8:12
It's important that constructive discussions take place to reassure lenders and creditors and where appropriate to renegotiate terms for payment or any terms for Lending.
8:25
Again, however, it's important to provide lenders in particular with up-to-date financial information to give appropriate reassurance maintaining an ongoing dialogue with key stakeholders is vital many banks will have their own business contingency plans and we'll expect their customers to make early contact. It's always better to be proactive in this regard.
8:53
Early discussion should take place regarding any need for additional Finance if required. However, once again, the directors will have an important judgment call to make here. They have to be sure that any lending does not overstretch the company's position and place it at greater risk of insolvency.
9:18
directors should take all appropriate steps to maintain insurance cover for the business obviously to protect both its existing assets, but also To protect the directors themselves against potential claims. If there is a relevant directors and officers insurance policy something that's often forgotten in the midst of financial difficulties and a difficult trading environment for a company.
9:51
Difficult decisions will have to be made in the course of any restructuring and reorganization of a business affected by a financial downturn reduction in staff numbers and other significant overheads is an important part of any restructuring exercise. John Heuvel has given advice on employment issues in an earlier webinar in this series.
10:14
Discussions with key creditors as I've mentioned will be required and if it's necessary payments rescheduled so that necessary arrangements can be made regarding the company's debts, but importantly taking care of all times that arrangements are not subject to a later challenge potentially as a preference.
10:39
Once the decision is made that a company cannot continue trading. The directors will have to take professional advice in relation to the appropriate formal insolvency procedure.
10:53
At all times it's important to minute all decisions made and where appropriate to take professional advice on the necessary route for the company to follow whether that be liquidation which will involve a complete cessation of trade.
11:12
Administration which may involve some ongoing trading under the management of an administrator or a company voluntary Arrangement where the directors of the company retain management control over the business, but subject to an agreed set of proposals over a period of time to pay creditors.
11:36
An agreed sum under the supervision of an insolvency practitioner.
11:43
Depending on the process to be adopted the timing of any cessation of trading will have to be decided by the board.
11:51
if that's appropriate and close liaison will be made with any insolvency practitioner who is to be appointed so that critical payments during any Hiatus period can be identified and made and in particular how you deal with key overheads specifically staff and any leased property staff for a key component to any business but also an expensive overhead It is important for directors to remember that although they will lose management Powers. Once a company goes into liquidation or Administration. They remain subject to statutory obligations as directors as long as they're registered at companies house.
12:41
A recent decision in the high court confirmed that a directors fiduciary duties can continue after the company has entered into an insolvency procedure as a result directors should take particular care when acquiring assets under a pre-practice transaction from an administrator.
13:03
So that they ensure full disclosure of that transaction is made and a proper value is paid for those assets.
13:11
To guard against any potential challenge by Liquidator the might be appointed at a later date.
13:21
Now most recently. The chancellor has announced some important insolvency related changes in last week's budget.
13:32
As ever with this government, it's a carrot and stick approach. First of all the carrot.
13:39
The government is launching a 30 billion pound fiscal stimulus package to help businesses and individuals through the core over coronavirus outbreak.
13:49
Although it would appear only 12 billion pounds of that is Coronavirus specific the headline elements of that package our support for businesses, including a scaled-up time to pay scheme a new coronavirus business in Corruption loan scheme, which will see loans of up to 1.2 million pounds supported by an 80% government guarantee and also a business rates holiday period for businesses and business rates as many of you will be aware.
14:26
It's a particular sensitive issue for a number of retail businesses.
14:39
the stick approach Is that hmrc will have the power from the 6th of April 20 22 make directors and others personally liable for corporate tax debts in certain situations and those situations are where hmrc suspect the director of abusing the insolvency framework in order to avoid paying taxes hmrc a looking at Phoenix situations here.
15:12
We're directors acquire their existing businesses from an insolvency practitioner, perhaps under a pre-pack or similar transaction. And where those directors are linked to a company and have a track record of insolvency. Now, there are a number of issues that need to be looked at there. We don't have time for that today.
15:35
But this is certainly something that directors need to be aware of and need to take particular care when managing companies who are struggling financially.
15:52
Well, thank you for listening to today's webinar on minimizing Financial Risk to business.
15:58
We've had a few questions come in. So I'll answer a couple now and then send a follow-up of the others along with the recording of the webinar.
16:08
The first question concerns wrongful trading. How do you reduce the risk of a claim for wrongful Trading?
16:18
We'll just to remind you the wrongful trading will occur.
16:22
When the directors know or should know that the company is likely to become insolvent and they continue to trade nonetheless and the effect of that continuing to trade is that it increases the deficit to creditors and in appropriate circumstances. If there is a finding of wrongful trading a court can order that the directors have to pay compensation.
16:50
Relating to that deficit to the company acting by its liquidator.
16:58
Now how you determine whether you should continue to trade?
17:02
In financial when the company is in financial difficulty will be a matter of fact in every case. It's an important judgment call and one that should be taken with reference to specific up-to-date financial information and professional advice.
17:19
It may be appropriate in certain circumstances to continue trading where the benefit Of doing so it's for for the good of the creditors of the company as a whole.
17:33
But professional advice must be taken at all times.
17:39
The second question if a company is in financial distress, are there any circumstances when you can pay certain creditors ahead of others?
17:49
Well, that's an interesting point. And again here you'll remember that. I covered the issue of preference payments in my presentation now in certain circumstances, it is permissible for a company authorized by its directors to make payments to certain creditors and not others without those payments being subject to a claim by way of a preference.
18:18
No circumstances will be where the particular creditor in question is a key supplier or a landlord and where the payment is necessary to enable the company to continue trading for the benefit of its creditors as a whole each situation will depend on its own facts. And again any decision made by the directors in this regard will have to be supported by both up-to-date financial information and appropriate.
18:48
Will advise properly minuted. Well, thank you for all the great questions, which I'll follow up after the session and share these with you.
18:58
The next webinar in our series is tomorrow on business and Banking and that will be given by my colleague Christopher Von stranden.
19:07
for further advice and guidance on the coronavirus outbreak, please contact our dedicated resource Hub at shma.co.uk-- Thank you very much.