Nick Booth and James Robbins from Harrison Drury’s insolvency and commercial team offer guidance for company directors, following the government ’s recent range of measures to help businesses continue trading during the coronavirus pandemic.
Last updated March 30, 2020
The coronavirus pandemic is creating unprecedented business disruption across the UK and it is inevitable that many businesses will face insolvency during this time.
The government has recently announced a range of measures, based on recommendations by the The Insolvency Law Committee, to help businesses to continue trading by giving them extra time and space to weather the storm. The full range of measures is yet to be determined, but the government is set to include a moratorium on winding-up petitions and a temporary suspension of the wrongful trading rules under the Insolvency Act 1986.
The latter will remove the threat of directors incurring personal liability for continuing to trade whilst insolvent, even if a company continues to incur liabilities such as by taking out government-backed loans, during this time. The change in the law will apply retrospectively from March 1, 2020.
Nonetheless directors remain bound by their other statutory duties, including to exercise reasonable skill and care in the management of their company’s affairs and when a company becomes insolvent or is likely to become insolvent, to act primarily in the interests of its creditors.
Directors should therefore consider taking the following steps, notwithstanding the temporary suspension of wrongful trading rules, in order to minimise the risk of insolvency and incurring personal liability.
Step One: Make a comprehensive business assessment
As outlined in our article on businesses protecting their finances during the coronavirus pandemic, this will include a realistic budget forecast of what sources of income the business is likely to realise during this time, as well as a structured plan to reduce expenditure.
Examples of reduced expenditure include forgoing business expansion and limiting outgoing costs to what is strictly necessary to continue trading. Directors should assess payments on the basis that they are necessary for the continued operation of their company.
This assessment also extends to ensuring the company has all necessary insurance policies in place and up to date, and directors may also consider taking out directors’ and officers’ liability insurance.
Step Two: Continue holding board meetings
Board meetings should occur as frequently as is necessary to ensure that a business is able to react to any new event which will affect it, which at the moment, is relatively frequently. For example, the board should meet to consider which staff are non-essential and could be placed on the Coronavirus Job Retention Scheme.
The board should revisit decisions in the light of novel circumstances where possible in order to ensure it can be seen to react to present circumstances. Employees will often be considered necessary to continue trading but a business may relieve potential cash flow problems by operating only with essential staff. Further, a director should ensure that all potentially available grants, loans and government schemes are considered at these meetings.
The directors should consider holding board meetings by telephone or video conference. In many instances, a company’s articles of association will specifically provide for this but, even where that isn’t the case, the general view is that boards can still validly carry out business in this way and the courts would be unlikely to question the validity of board decisions taken by telephone/video conference, provided all the necessary formalities had been appropriately followed.
Step Three: Maintain up-to-date financial records
This ties in with preparing a realistic budget as considered above. These records will be vital for directors to be able to make sensible, informed decisions at board meetings on the present and future circumstances of the company. This includes obtaining independent financial advice on the viability of the company.
Step Four: Keeping company creditors in the loop
During this period, creditors are likely to be as concerned as directors about the viability of the business. It is pertinent to update large creditors on decisions made by the board and the general operation of the company, and to keep all creditors regularly informed. This will help manage and alleviate creditor pressure pre-emptively. However, it would be possible to over-inform creditors, and a balancing act should be performed by directors as to the potential impact of informing creditors of the businesses’ every move.
Step Five: Seeking professional advice
Ultimately, should a director consider that there is a possibility that his company is insolvent, then they should take professional insolvency advice, and continue to take advice in the light of new developments or the lack thereof. It will be important to ensure that directors consider the relevant factors and can evidence the decision-making process.
It goes without saying that all of the above steps should be thoroughly documented, for example, by ensuring that board minutes document the discussion of financial issues caused by the current coronavirus COVID-19 pandemic.
To understand how we can help you reduce your exposure to risk, or to speak to a specialist in Harrison Drury’s insolvency and commercial team please contact Nick Booth or James Robbins on 01772 258321.