31 March 2020
The resilient business
It seems like a lifetime ago that the UK was concerned about the impact Brexit would have on our economy and in turn businesses but it was only two months ago that the UK’s departure from the EU was hot news.
The headlines for the past few weeks have, however, been taken over by reports on the Covid-19 pandemic and as business for some companies slows down and for others picks up at a pace not experienced before, it is no surprise that businesses of all sizes will suffer disruption in some form or another; be it due to the threat on the companies’ workforces’ health and safety being comprised, IT infrastructures being challenged by remote working, delays and/or shortages in the supply chain and/or as a result of material declines in the company’s revenue. Whichever boat a Company finds itself in, these are challenging times, and one thing is for sure, careful planning is needed to ensure business continuation.
Assessing and analysing the various components of a business at this unprecedented time will therefore be crucial to identify measures that a Company should take to prepare, prevent and palliate against disruption. Directors have of course statutory and common law duties, and these duties become more so important during times of disruption and distress. Decision making by directors will therefore need to be carefully thought through and deliberated at board meetings before any strategic or operational decisions are made concerning the company and detailed minutes of such meetings should also be taken as evidence of the directors acting in accordance with their duties.
For companies that have seen a slowdown in income, mitigating cash outflows in order to protect its cash position will be of outmost importance. As companies continue to pay their fixed outgoings, they will want to ensure that they avoid dipping into their reserves as much as possible. Reviewing discretionary expenses, putting a halt on recruitment and reviewing its contracts will therefore all be a good starting point, whilst also considering the support package being offered by the government.
In reviewing contracts, companies will need to check whether they have the right to terminate or invoke a force majeure and if so how, or consider renegotiating its contracts or relying on the doctrine of frustration. Finding new ways to operate and identifying others segments in the business that are or can be profitable will also be crucial in enabling the company to optimise its existing resources and generate income.
But what happens when the precautionary measures are just not enough? What must a company do in such circumstances?
The directors duties in such circumstances change from being owed to the Company and its shareholders to its creditors. Directors will therefore need to consider whether it is viable for the Company to take out any credit and consider the financial impact this will have on the company and its ability to repay the same. If this is not an option, raising money from its stakeholders may need to be considered, and so the directors should consider mapping out its key stakeholders well in advance.
If all else fails, the directors will need to consider whether the company should continue trading or whether they should pull the plug. Ultimately, the directors will need to decide whether there is reasonable prospect of the company avoiding liquidation or whether they are likely to dig themselves into a bigger hole by continuing to trade. This is never an easy decision to make but it is a crucial one to ensure that the directors are not later down the line accused of wrongful trading when the company goes into liquation, exposing them to personal liability.
As a multi-service law firm, our solicitors are ready to help guide you and your businesses in these unprecedented times. If you or your business require our assistance on any of the above or on any other pertinent issues, please do not hesitate to contact us on firstname.lastname@example.org or call 01753 279016.