COVID-19 | Preserving your business and avoiding insolvency

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I'm Shaun Moran a partner in the restructuring and insolvency team here at Shakespeare Martineau. Welcome to today's webinar the latest in our series dealing with the impact of coronavirus on your business. You will see on your screen that you are able to ask questions. So, please do raise these along the way and I can answer as many as I can at the end.
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We are now into the second full month of the government lockdown and the effect upon individuals and businesses has been predictably far-reaching.
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Nevertheless many Business Leaders have come out quickly and publicly to say that the crisis has shown companies to be admirably resilient and was concerns understandably remain about the return from the lockdown many are positive about what they view as The New Normal and how they can protect their business going forward.
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In this presentation, I'm going to provide a brief reminder of directors duties outlined some important changes, which have been introduced as a result of covid before focusing on key issues, which I consider to be crucial to the survival of your business.
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I will conclude with the review of the options directors have available. Should they find that their business is not able to meet the challenges ahead first, then a brief overview of the key duties of a director, which come into focus at this challenging time for business with a warning of the risks faced. If there is a breach of these duties consistent with the entrepreneurial spirit that drove you to create and grow your business is the overriding duty to promote the success of the company for the benefit of its shareholders.
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This puts the company at the Forefront of your priorities and interests faced with the present situation directors must use their skill and care to ensure that their business adapts to the challenge faced and shows resilience in the face of adversity. Now more than ever directors have to consider the overall picture and make tough decisions avoiding wherever possible any conflict of interest this may mean making financial decisions for the benefit of the company.
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employees and other key stakeholders when those decisions may have an adverse effect on the directors personal position where the financially or otherwise should the directors of a company conclude that the business is insolvent or risks going into insolvency the priorities change and the directors must consider the effects and the interests of creditors of the company Above All Else, of course, one of the benefits of incorporating your business is that an owner director is protected personally in relation to the liabilities of that business.
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But that protection May however be lost in the event of insolvency where directors could face personal claims for breach of Duty or to repay unlawful dividends or possibly to reverse transaction seem to be preferences all those conducted to Sun undervalue and occasionally in the most extreme cases. They may face claims for compensation for fraudulent or wrongful trading the government acted quickly to announce some interim relief measures for businesses as well as proposed.
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changes to UK insolvency laws I'm sure that you will all be aware of the pressures faced by the retail sector even before covid hit the devastating effect of the lockdown on business tenant prompted changes under the coronavirus act 2020 which came into force on the 25th of March.
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This legislation provides that a right of re-entry or forfeiture under a business tenancy may not be enforced by reason of non-payment of rent During the period 26th march to 30th June 2020 or such later date as is decided by further legislation.
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This may help tenant cash flow in the short term. Although there will be nothing to stop a landlord from taking action after the relevant period bearing in mind. Of course that many landlords have been adversely affected by the covid outbreak as with other legislation brought in in response to this outbreak. This is not a straightforward waiver of liability for tenants the legislation provides interim protection only and directors of those companies must focus on ensuring their businesses able to observe.
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the terms of the lease other legislation which has been announced but which is not yet in force is intended to give companies time to adapt to the present crisis and provide some breathing space to restructure where possible short of entering into the formal insolvency models that already exist.
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For example company voluntary arrangements and administration a suspension of the wrongful trading Provisions currently for three months from the first of March 20 20 Has received perhaps the most national publicity of the three measures. I'm looking at here.
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You remember the test for wrongful trading where the director knew or ought reasonably to have known that there was no Prospect of the company avoiding going into insolvent liquidation or Administration that director May face liability for a financial contribution to the assets of the company. It is important to remember that as with the suspension of enforcement action in relation to commercial leases. I've just mentioned this is only a temporary measure.
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You should give come for only to essentially honest directors operating in difficult circumstances and not those whose motives are less honorable.
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The other proposed changes in fact originated from the government's 2018 insolvency proposals announced in August of that year.
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These measures are not yet in force. The first is a new moratorium for an initial 28-day period triggered by a court filing. This can be extended to 56 days in order to provide short-term protection for a struggling business. This process will be overseen by a monitor. Although the company would remain under the control of its directors.
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The other change is a restructuring plan, which would operate in a similar way to and alongside existing schemes of arrangement.
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Although the details are not finalized this proposal appears to be a more complex initiative and the wrongful trading suspension and short-term moratorium. I've mentioned unlike those procedures. It looks slightly out of step with the spirit of much of the covid related changes, which focus on temporary relief for businesses hit by the pandemic and it remains to be seen how far this is pushed as a matter of urgency later this year.
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I'm not going to look at five steps you can take to protect and Safeguard your business.
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First your workers the key to most businesses. The lockdown has forced employers to reorganize staff to adapt to a new working environment following the reopening of business premises. There will be an obligation to ensure a safe working environment. So review your workplace needs and consider flexible working where possible or perhaps even shift patterns at all times. Make sure that you communicate regularly.
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Lee and effectively with your staff Secondly make use of the readily available Public Funding. The government has responded to the pandemic with a raft of schemes and assistance. I'm sure you'll be familiar with these by now. They include the small business grant fund the retail hospitality and Leisure Grant fund aimed at protecting a sector particularly badly hit by the outbreak as well as the business Interruption loan scheme. And of course the job retention or furlough scheme.
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The treasury is also making plans to expand this assistance to larger companies and fast growing startups with Russia soon acts saying last week. I want to ensure that no viable business falls through our safety net of support as we protect jobs and the economy.
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I appreciate that many of you may have experienced difficulties in accessing funds this way as the institutions set up to manage the schemes struggle with the weight of claims. This should not deter you if you consider your company qualifies and can benefit from assistance then you should proceed.
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It is however worth remembering that as with all the measures introduced in response to the outbreak the schemes and assistants are intended for businesses. That would be viable were it not for the pandemic the government promotes the support of businesses dealing with covid related issues and this funding should not be seen as a sticking plaster or temporary relief for a business that was struggling before the third key factor to perfect protect the ongoing viability.
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If your business is to focus on finance specifically undertake a continual review of your cash flow and working capital requirements.
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Challenges caused by supply chain disruption or a loss of customers due to the lockdown will affect income and your ability to meet essential outgoings. Therefore. It's fundamental that you take the following steps first prioritize cash collection in the covid era cash is King your customers and clients may find every excuse for refusing or delaying payment but cash is key to the survival of any business.
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Second Monitor and prioritize outgoings treat this as an ongoing emergency and restrict non-essential spending remember though that investment remains key to growth. So it's a careful balance here.
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Third avoid breaching Financial covenants by keeping a close scrutiny on asset values which may affect your balance sheet.
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Fourthly re-review Capital spending for example leases bearing in mind my comments before on agile working and finally under Finance consider options to inject new funds into your business beyond the short-term made. I've just mentioned this will ensure your business remains viable now is the time to communicate with your lender remembering that an open dialogue is always vital to engender confidence in your business.
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The fourth issue that you have to bear in mind in this situation is regular interaction with other key stakeholders. This is vital whether that be landlords or creditors customers and suppliers as mentioned before or indeed. Hm Revenue & customs.
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It's important to seek to negotiate terms with suppliers many of whom will be facing the same situation as your business.
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It's all about working together now to meet the challenges of adapting to a new working environment, of course hmrc can be the most challenging of these stakeholders where you are a struggling business and any concessions that they may now make available in the form of that deferral or time to pay will no doubt be closely monitored against the risk of potential abuse so beware, We've looked at for issues in this part of the presentation people Public Funding Finance generally and communication with key stakeholders the fifth point for any business that expects to prosper following the challenge of covid-19 is to ensure that you have a viable business continuity plan.
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This will deal with the challenges necessitated by reorganizing teams remote working and relationships with other key stakeholders in particular lenders and suppliers.
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When other two men one other matter to mention now, but which is a fundamental importance to any continuity plan is protection for your company against cyber fraud. It's essential to have this in place in order to meet the threats of the pandemic provides for criminals to infiltrate your systems. I conclude today with a look at the options as businesses emerge from the first phase of the outbreak.
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Is your business resilient and able to survive is it back to business as usual somehow? I very much doubt that it may instead be an appropriate time for you to consider a formal restructuring of your business involving perhaps new lending or other options as part of a fresh beginning remember hear what I said about maintaining a regular dialogue with financial stakeholders in your business.
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Alternatively, you may think the ones the dust settles. This is an appropriate time for a sale at the business as the markets recover.
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Will that be a conventional sale and what will that mean for The New Normal or will you be better suited to an accelerated merger and acquisition process working with a specialist turnaround advisor albeit outside of formal insolvency scenario.
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The last option for a business that cannot recover is of course a formal insolvency whether that be a company voluntary Arrangement the appointment of Administrators or liquidation you may be able to take advantage of the proposed 28-day moratorium period under the supervision of a monitor or the restructuring plan both of which I mentioned earlier, but do remember that these Provisions are not yet in place. We will of course keep you updated.
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With any legislative changes so that you remain aware of all potential options for your business.
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Which of these scenarios your company will face will depend upon how strong it was going into the crisis and how you react now applying the five steps. I've outlined today. These have indeed been unprecedented times and we know the ride is far from over. We look forward to working with you as you deal with the exciting challenges ahead. We have 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.
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First question. Do you think that Rogue businesses will take advantage of the changes you have mentioned to the insolvency legislation, perhaps to the detriment of their creditors.
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Well, I assume here that you're referring to the suspension of the wrongful trading provisions.
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It's important to remember that this and the other proposed measures are not intended to be a get out of jail free card for those zombie businesses, which should proceed into formal insolvency Arrangements rather than trading on to the detriment of creditors. It is only a three-month period at this stage and also even during that period directors could still face liability for fraudulent Trading.
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Or potentially claims for breach of fiduciary duty that I mentioned earlier in the section dealing with directors duties second question.
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Which one of the five key steps you've mentioned do you think is the most important for businesses at this time?
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Well this very much depends on the type of business you have if it is labor intensive, you'll focus on staff perhaps to a greater extent but I think that all five matters are closely intertwined what Arrangements you make for flexible and safe working will impact on your capital outlay and cash flow for the business. You may need funding to promote agile working, but you'll also need to ensure your systems are robust against attack. So really I think it is the case that all five are important.
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And each is in some way dependent on the other. Thank you for participating today in the next of our seminars tomorrow. Jon Heuvel and Tijen Ahmet who will look at the issues of furlough for international employees working in the UK.