Coronavirus: Tips to help businesses avoid insolvency

With coronavirus causing unprecedented distress to the whole global economy, all types of business in every sector will be affected. These are not normal times, and it is clear that all businesses will need to formulate coherent action plans to survive. The Government appears to be working on emergency plans to provide help to trade and industry that has already been badly affected by underlying economic uncertainties. More high-street names have closed their doors this week.

A director is under a duty to act in the best interests of the company and its shareholders. However, once a director forms the view that the company is insolvent, their duty is to act primarily in the interests of the company’s creditors.

If a director allows a company to incur liabilities when they know, or ought to have known, that there is no reasonable prospect of the company avoiding insolvency, they may face personal liability to compensate the company for the losses sustained and/or disqualification as a director. Such claims are usually brought using evidence obtained with the benefit of hindsight.

Businesses which were insolvent before the pandemic will probably go bust. Many others which were solvent will need “hand holding” and should consider the following:

1. Look at the short term

Prepare a realistic budget of what income the business is likely to receive over the next few months, both on a best- and worst-case scenario. How much cash will you need to continue to trade?

Are there any costs and expenses your business is going to struggle to meet, such as wages or rent (given the next rent quarter day is on 25 March)?

A budget needs to be realistic for two reasons: firstly, so you know what immediate steps you need to take to deal with a reduction in income, and secondly, so you can accurately communicate with creditors, lenders and suppliers should you need their help to continue to trade.

2. Cutting costs

Businesses should consider what non-essential expenditure can be reduced or avoided now?

For example, a business should consider postponing any non-essential expenditure that had been planned.

Secondly, are there steps that can be taken now to reduce expenditure? For example, should staff be asked to take a temporary reduction in hours?

3. Insurance

Businesses should check what insurance cover they have:

• Business Interruption
• Employer’s Liability
• Crisis Management insurance
• Mitigation insurance
• Reputational insurance

Check your policy documents carefully. If your policy does provide cover, seek guidance from your broker regarding your next steps.

4. Keep contemporaneous records

Record all decisions made regarding your business within contemporaneous minutes which explain the rationale behind them. If decisions are based on forecasts or advice, the minutes should specifically refer to them.

This will assist directors should they be required to explain their decision making at a later time.

5. Ask for help

There are a number of ways in which a business may be able to obtain help in order to continue to trade during this period:

• Government Assistance – On 17 March 2019, the Chancellor:
  • Announced that businesses would be provided with Government-backed loans and guarantees valued at £330bn.
  • Confirmed that no business rates would be payable by pubs, shops and restaurants for the next 12 months.
  • Encouraged insurers to pay out on policies that have business interruption insurance and offered cash grants of up to £25,000 for small businesses that do not have business interruption insurance; and
  • Offered cash grants of £10,000 to small businesses.
• Further announcements are to follow in the coming days, with the Government pledging “it will do what it takes” to support businesses.
• The bank – Will they consider granting a repayment holiday on any borrowing or agree a short extension to your facility or overdraft?
• Refinance – If your existing bank is not prepared to help, would an alternative lender be able to do so via a refinance?
• HMRC have in the past offered time to pay arrangements to businesses and are now relaxing payment terms and offering time to pay arrangements. These include short payment holidays and reduced payment by instalments.
• Landlords – Will they consider either a rent payment holiday or a reduced rent for the period of disruption caused by the virus?
• Suppliers/ Creditors – They are likely to be in the same position as you but may be able to relax their payment terms.
• Seek advice from a professional such as from Keystone Law’s Restructuring & Insolvency team.

The early preparation of a cash-flow forecast supported by an insolvency expert will either allow the business to properly manage the situation or allow for a strategy to be implemented that might save the business. Furthermore, it will also demonstrate that a director took the requisite steps should their conduct be questioned after the event with the benefit of hindsight.

It is essential that businesses begin dialogue with suppliers as soon as possible. It is widely known that tight control of cash flow is essential for businesses to survive, so traders will be looking to reduce their debtor days and pull in cash – while often having to understand that their customers are facing unprecedent uncertainties of their own.

Should you have any queries arising out of this KeyNote, please do not hesitate to contact Stephen or Mark using the details below.