In the months to come, organisations are set to face numerous issues (both legal and commercial) as a result of the pandemic. Last week, the Chancellor set out a package of temporary, timely and targeted measures to support public services, people and businesses through the period of disruption caused by COVID-19. It is unclear how long it will take the government to implement these packages.
This note considers the situations businesses are likely to encounter and suggests mitigating steps in order to reduce the negative effects that COVID-19 may have on trading.
1. Employment / HR
On 20 March the Government announced its job retention scheme, aimed at securing the jobs and pay of thousands of employees faced with an immediate loss of income due to the impact of the coronavirus on jobs.
Birketts have produced a useful article on the government’s job retention scheme and how it can be appropriately utilised.
Birketts have also outlined employer duties under health and safety law in light of the pandemic.
If you are an employer, it is important to consider if your policies on remote working, annual leave, sick pay and similar need to be updated.
2. Review if existing contracts are still enforceable
Following the government’s mandatory closure of a number of businesses (including pubs, clubs and gyms) and an imposition on the general public of a three week lock down (with the possibility of this being extended further), organisations may struggle to fulfil their contractual obligations or suffer loss as suppliers are unable to fulfil theirs.
Under normal circumstances, a claim for damages for breach of contract would be a possible remedy. However, where the contractual failure was principally caused by COVID-19, a claim may not be viable if:
- there is an applicable force majeure clause in the relevant contract (this will vary depending on a contract’s specific drafting); or
- the doctrine of frustration applies.
Birketts have produced a helpful article on the doctrine of frustration and force majeure clauses in light of COVID-19.
3. Review insurance policies
Businesses across the UK are set to suffer a variety of losses as a result of the COVID-19 pandemic. Organisations should consider what commercial insurance policies they have in place to protect from coronavirus-related losses, including:
Traditional business interruption insurance - often purchased alongside property damage cover, such policies may be difficult to rely upon if there is no physical loss or damage to the property.
Contingent business interruption insurance – this typically relates to where loss of use of the property is due to the action of civil authorities. The government’s imposition of a lockdown and bans on organisations such as pubs, clubs and gyms may trigger such policy.
Losses caused by notifiable infectious disease - notifiable infectious diseases are listed under the Health Protection (Notification) Regulations 2010. Coronavirus became a notifiable infectious disease on 22 February 2020 in Scotland, on 28 February 2020 in Northern Ireland and on 3 March 2020 in England and Wales. Any losses caused before these dates will not be covered, even if your business has this cover.
Cancellation and abandonment insurance – COVID-19 has led to a widespread cancellation or postponement of events. Businesses should consider if irrecoverable expenses and loss of net profit can be recovered under their insurance policies.
An organisation’s policy and the specific language and clauses within the same are key to determining whether losses suffered due to COVID-19 are covered.
Businesses should also consider whether their insurance policies cover them for any liabilities connected with COVID-19 (such as claims from clients, members of the public and employees for failure to adequately protect).
4. Legal compliance
An organisation’s actions must continue to be taken in line with existing laws, rules, regulations and internal compliance programmes. The challenges resulting from COVID-19 do not negate the requirement to carry on business in the right way and without taking short cuts for the sake of speed and efficiency.
For example, where a company is facing financial hardship:
- Where a company is insolvent (on a cash flow or balance sheet basis, taking into account contingent and prospective liabilities) or is likely to become so, directors owe their duties to creditors (as a whole) and not shareholders.
- Each company’s creditors (taking into account their priority i.e. secured vs unsecured) should be treated equally and no creditor should be preferred over another.
- All transactions should be carefully considered in the context of a company’s solvency position. Reasons for entering into or not entering into a transaction should be fully recorded.
- Always consider whether a company should continue trading, taking account of whether the company can avoid insolvent liquidation. If a company continues to trade where there is a risk of insolvent liquidation, all necessary steps to mitigate the loss to its creditors should be taken. Actions need to be taken with the interests of creditors in mind and simply ceasing to trade will not necessarily be in the creditors’ best interests.
COVID-19 will not temporarily absolve directors of their statutory duties.
Company directors should reflect on their duty to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In light of the pandemic, factors that directors must take into account include the interests of the company’s employees, the impact of the company’s operations on the community and their duty to exercise reasonable care, skill and diligence.
Where the continued solvency of the company comes into question then the focus of directors' duties changes from promoting the success of the company to acting in the best interests of creditors as a whole. It is at this point that the risk of personal liability of the directors becomes more pronounced. Directors may be held personally liable to company creditors where they allowed the company to continue to trade, despite knowing (or having ought to have known) that there was no reasonable prospect of a company avoiding insolvent liquidation or insolvent administration.
There are defences to continuing to trade but directors are strongly advised to seek appropriate professional advice (lawyers/accountants/insolvency practitioners etc.) before deciding to do so.
Birketts has produced an article on the effect of COVID-19 on directors’ duties and creditor action.
5. Review your template contracts
The terms and conditions of your template contracts should be reviewed and potentially amended to reflect the impact that COVID-19 is likely to have on your industry.
Key areas to consider include:
- variation (for example, how the contracts can be re-negotiated so that businesses can adapt to the COVID-19 pandemic)
- price and payment (including provisions for price increases based on general increases in costs);
- currency (including fluctuation, conversion, payment);
- termination (if the supplier shows signs of financial or contractual failure, or if there is an external event that may cause a failure, it is advantageous for a customer to have the right to terminate the contract and begin work with an alternative supplier)
- payment terms – taking into account economic uncertainty and a need to stabilise cash flow.
6. Consider available financial support
The government has introduced a Coronavirus Business Interruption Scheme which will support SMEs with access to loans, overdrafts, invoice finance and asset finance of up to £5m and for up to six years. A Business Interruption Payment will also be made to cover the first 12 months of interest payments and any lender-levied fees, so there should be no upfront costs and lower initial repayments.
7. Amend current agreements
Over the coming months, your business may enter into new arrangements both upstream (e.g. suppliers and trading partners) and downstream (e.g. customers and clients).
Changes to current agreements should be recorded in writing.
Your organisation should also prepare business plans where credit control procedures have changed, including for recovery of debt (where it is the creditor) or repayment of debt (where it is the debtor).
Customers, clients, contractors, suppliers and trading partners should be updated on your organisation’s business activity and have an understanding of what level of service you intend to provide moving forward.
9. Deferring outgoings
Central and local government, HMRC, banks, landlords and privately owned businesses are introducing provisions allowing for the deferment of payments. Consider whether the following can be deferred whilst your business stabilises:
- Business rates
- Finance payments
Karl Pocock, Head of Corporate Tax at Birketts has produced guidance on COVID-19 tax reliefs.
10. Advertisement campaigns
Current advertising campaigns may need to be withdrawn if they are advertising services or goods which your organisation can no longer supply – either logistically (for example, as you are out of stock), or from a legal viewpoint (e.g. because you are no longer allowed to trade lawfully during government’s imposed restrictions).
Future advertising campaigns will need to consider the significant increases in digital traffic and digital media consumption moving forwards, given the UK’s newly imposed lockdown and a surge in ‘working from home’.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2020.