As part of adding value to what we do and as part of our relationship with our clients, referrers and others in the business community, we are planning to issue weekly Commercial updates drawn from what we have been asked to look at and advise on, to create a knowledge base for you.
These are ideas and thoughts to consider rather than specific legal advice for any one set of circumstances, but please do please get in touch if there is anything we talk about that you would like further details on or legal advice tailored to you.
The first of these updates is a sense check of what business owners can do in the current uncertainties – we hope you find it helpful.
Following the outbreak of a global pandemic and the strange days we are living in, businesses are now wrestling with a new reality of managing staff illness, forced closures, supply chain disruption and loss of business. Government measures may be useful to preserve cash and prevent insolvency among UK businesses, but what else can we do?
The following are some issues to have in your business plan moving forwards.
- Be collaborative and see the bigger picture in the approach to your contracts and key relationships with both suppliers and customers.
Collaboration is really important both to find potential solutions that provide business continuity and certainty now and to help to build the foundation for more beneficial future working relationships. Keep contemporaneous records of all discussions and decision making processes so that you have the evidence to fall back on later, should you need this and ensure that all discussions, meetings and communications about changing any terms of business or similar (including emails and other electronic messages) are expressed, and understood to be, on a “without prejudice” and “save as to contract” basis unless and until any new formal agreement is reached.
- Seek out new financing solutions.
A fall in revenue can make it difficult for businesses to service their existing debt obligations. We are very aware of the delays in getting this, but you should look at the Coronavirus Business Interruption Loan Scheme (CBILS), which will lend up to £5 million in the form of term loans, overdrafts, invoice finance and asset finance to viable businesses. Often, finance providers will be far more sympathetic if early conversations are had. Any further terms asked for in relation to any change in your finance arrangements should however be considered carefully and advice sought where needed. In this regard, we will be dealing with personal guarantees in our commercial update 2.
- Review your contracts now: know your contractual entitlements and obligations, and those of your counterparties to ensure you are making fully informed decisions.
Don’t forget to consider boilerplate clauses, which not only include Force Majeure clauses, but those dealing with waiver of obligations, variation, governing law and dispute resolution.
- Try and scale down cash outflows:
Look at re-negotiating (if you can) the terms of any key contracts. The most important of these, and also likely to be the most difficult to achieve, is the renegotiation of terms between a landlord and tenant. You could look at the following potential list of key ‘direct’ concessions:
• discounted rent
- a rent deferment where the obligation to pay rent does not go away but a payment plan might be agreed between the parties for deferred rent
- a rent-free period
- service charge reduction
Whilst the temptation might be to reach an informal agreement, you should absolutely get this documented and make sure any variations are SMART (that is specific, measurable, achievable, realistic and timely). We’ll look at this in more detail in our commercial update 3.
- Consider your employees:
This is usually both your greatest resource and overhead. Many employers are now looking at cross-training staff so that they are able to perform a variety of roles in the business. Beyond that, more than ever now, technology (including the tech that allows employees to work outside of the office), is the way to future-proof your business.
As with all change, regular communication with staff is vital, both in terms of explaining your response and in publicising the latest updates and schemes available to employees, such as the government scheme for refunds of advance rail fares.
Where more drastic action is needed, you should plan and consult with staff carefully. Options to consider include reduced pay, reduced hours and redundancy, but specialist advice should always be taken on any proposed course of action. Again, delays notwithstanding, try to take advantage of the Coronavirus Job Retention Scheme, which will give all UK employers the ability to pay part of their employees’ salary (up to 80% of their workers’ wages up to a limit of £2,500 a month) for employees that otherwise would have been laid off.
Set up a payment plan for quarterly VAT and seek whatever further concessions you can from HMRC. The government has announced a deferral on VAT payments, so that payments due between 20 March and 30 June 2020 will now not need to be made until 31 March 2021. Ensure that you cancel any direct debit mandates but make sure that you file any required returns on time. Use this deferral period well – make sure you can pay all liabilities that will accumulate during it.
- Prepare a short-term business ‘crisis management’ forecast… but also establish longer-term procedures and stick to them:
Any cash flow forecast modelling the business over the next 2-3 months will help you prepare to mitigate the effects of the virus and hopefully maximise the chances of success in any contract renegotiations or new financing. We think you should plan to be in survival mode for perhaps two or more years and look at possible long-term procedures such as the formulation of specific areas of responsibility for each director, the production of detailed, accurate and up-to-date management accounts; a review of the position of the company’s creditors; and focusing on debt collection.
Key business decisions requiring board and/or shareholder consent should be made virtually. Most companies’ articles of association allow for virtual meetings and most of us are now aware of how to hold meetings by telephone or video conference, but it is especially important in the current environment that the process set out in the articles for virtual meetings is followed.
For all companies, if it becomes apparent immediately before the filing deadline that accounts will not be filed on time due to your company being affected by Coronavirus, you may make an application to extend the period allowed for filing.
Under normal circumstances, companies that file accounts late are issued with an automatic penalty. Under the new measures however, companies are able to apply for a 3-month extension. Those that cite issues due to COVID-19 will have the extension automatically and immediately granted.
- Director duties:
The coronavirus will not relieve directors of the statutory duties they owe to their company. These duties, codified in the Companies Act 2006, are as follows:
- to act within powers
- to promote the success of the company
- to exercise independent judgment
- to exercise reasonable care, skill and diligence
- to avoid conflicts of interest
- not to accept benefits from third parties
- to declare an interest in a proposed transaction or arrangement.
Whilst a company is solvent, the second duty in particular requires directors to act in a way that they consider, in good faith, will be most likely to benefit the company’s shareholders as a whole. When carrying out this duty, directors should have regard, amongst other things, to the long-term consequences of any decision and the need to foster the company’s business relationships with suppliers and customers. We will be picking this up in a future update.
Beware also making sure that dividends paid during the pandemic are lawful – we will also pick this up in more detail in a future commercial update.
- Be realistic about the company’s prospects and act accordingly:
Where a company’s solvency is in question, the directors’ duties to shareholders will shift to a duty owed to the creditors as a whole. Past this point, actions taken will be under greater scrutiny and, in certain situations, directors may be held personally liable under the Insolvency Act 1986 for any loss suffered by the company as a result.
One area of temporary reprieve from such liabilities are recent changes announced in relation to wrongful trading. Under normal circumstances, directors may incur personal liability if they allow a company to continue to trade past the point where they should have concluded that there was no reasonable possibility of saving the company. New measures announced recently will allow directors to trade, even if there are reasonable grounds to suspect the company could become insolvent, without incurring personal liability (this applies in respect of actions taken post 1st March 2020). There will also be a temporary moratorium to prevent creditors from seeking to wind up companies that are seeking rescue or restructuring.
Nevertheless, ensure that issues are identified and dealt with. Document all decisions (for instance, regular email correspondence between directors and properly minuted board meetings) and demonstrate that all decisions made by the board are reasonable in the circumstances. Where insolvency is a possibility, despite the breathing room provided by the new measures, ensure you take appropriate business and legal advice. It almost goes without saying, but do not transfer key assets out of the company where there is no commercial justification for doing so.
Finally, and most importantly on behalf of all the team, please stay safe and well.