Navigating the path to recovery
18 June 2020
For leaders of businesses in these extraordinary times, focus shifts to exposure to risk and for many the eligibility to receive government’s support, but for others whether there are opportunities to capitalise on. Whilst experience of past economic disruptions provides some insight into what could happen, the current situation is unprecedented and priorities should be considered including the viability of a business.
The UK Government and policy makers have been quick to react in providing multi-billion pound packages to support to businesses and individuals. As the landscape changes and the lockdown eases, entrepreneurs and owner managers should shift their focus to trading out of the current economic coma and strategically analysing the future of their businesses.
Whilst many have embraced the change to remote working and others have been forced into entire lockdown, recovery planning and consideration of funding and the legal implications for an exit out of the economic pandemic is paramount. Businesses need to be both agile and secure as matters change but equally having some form of business plan. While demand over the coming weeks and months is difficult to predict, an ability to recognise a new market place, in terms of the here and now and the new normal, will provide opportunities for those that have ridden the storm or have been able to capitalise on new revenue streams or operations. For those that haven’t, consideration needs to be born in relation to the duties of the directors and the risk this poses to those individuals.
For businesses that are facing financial difficulty or a funding gap, a key consideration needs to be the shift in the director’s duties with the addition of a primary obligation to act in the best interest of a company’s creditors.
A directors normal statutory duties continue to apply, but where a business is in financial distress, the additional primary duty in favour of its creditors leads to a number of potential pitfalls, as well as reviewable transactions. Breaching that duty can lead to personal liability on the part of the directors. Consequently, whilst there might be a wealth of opportunities to grab and potential transactions to protect a business’ assets, these need to be considered in the light of a potential insolvency risk. These risks can appear innocently in a transaction whether it be granting new security, transferring assets or taking on new contracts or obligations as well as making payments out to a company’s directors or stakeholders.
The Corporate Insolvency Bill offers some respite with a mix of temporary and permanent measures amending current insolvency law. The Bill marks a shift towards protecting viable businesses over the interest of creditors but also includes temporary measures protecting directors given the current economic situation. In particular, many directors may find themselves in the realms of wrongful trading, i.e. trading in a scenario where they knew or reasonably to have known that there was a risk that the company would enter insolvency. Such a breach can lead to personal liability and whilst under COVID-19 pandemic, this is a significant potential risk. The Government’s proposal includes a temporary only relaxation of the director’s responsibility however, this doesn’t change any of the director’s responsibilities under the Company’s Act or any other insolvency claims and, therefore, one might challenge the benefit of such early relaxation.
For companies considering some transactions right now, consideration needs to be placed on why they are to be undertaken, in particular, whether or not any supplier, customer or other third party is demanding payment or threatening claims or if sufficient value or consideration is being paid in relation to the proposed transaction or why the payment or variation is happening now. Whilst usually simply scenarios, each bares risk if one doesn’t understand the background for why a transaction might be happening and whether or not this is to protect assets or potentially defraud creditors. Such scenarios could be treated as fraudulent trading and subsequently unwound. Equally, transactions where fair value is not being placed on the asset transferring could be treated as a transaction at an under value or where accelerating a payment is made without a justifiable reason, a preference to that party. With these and many other insolvency claims, the timing for reviewable transactions will often catch out the directors. The transactions are not reviewable merely at the point in time that the company is imminently insolvent but in a period of 12 to 24 months prior to insolvency, opening up the risk that a prior transaction could be challenged by an insolvency practitioner.
Whilst the full impact of COVID-19 for society and business at large remains to be seen, there remains opportunity while some predict consolidation within various markets as value expectations are realigned.
So, are we all in it together? Largely, yes but some businesses are in trouble so their thoughts are likely to be more self-regarding. Assessing ones supply chain, understanding their position and having regular dialog to build resilience into supply will enable those businesses to gain from the opportunities in front of them but avoiding the potential insolvency risks.
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 June 2020.