With the impact of COVID-19 becoming more pervasive by the day, it is clear that companies across all sectors will be affected in one way or another by the crisis.
As many directors will already be aware, when companies experience financial difficulties, directors face certain additional duties and responsibilities. Whilst the substance of those additional duties and responsibilities (and their effect on the directors’ operation of the business) will always differ according to a company’s precise circumstances, we have set out below some practical points for directors to consider as part of the effective management of their duties.
Cash flow forecasting
Accurate and up-to-date cashflow forecasts are key to a company’s ability to navigate financial difficulties successfully and are also important to directors personally in discharging their duties.
This is particularly important in the current climate due to the frequency with which the position and outlook changes – as a result, a company’s financial projections will necessarily change with that same frequency (which could be multiple times a week). And although it is recognised that we are in uncharted waters (and, as such, forecasting is very difficult), by reviewing cashflow projections as often as possible, directors can mitigate risks that they and the company face.
Stakeholder engagement
It is essential to keep key stakeholders informed. It may also be the case that certain stakeholders will ultimately be asked to provide additional financial support, or other forms of forbearance, to the company. Demonstrating a credible strategy and being fully appraised on the capital structure and financial position of the company is imperative when engaging with stakeholders. Value break, contractual rights and regulatory powers and obligations are often key factors that will determine how a stakeholder will react when a company is financially distressed. Pending greater clarity, it is likely that we will see increasing use of standstill arrangements in the current circumstances.
Professional advice
If directors have any doubt about the financial viability of their company, they should seek independent professional advice as soon as practicable. In more serious cases, where there is no reasonable prospect of avoiding insolvency, that advice can assist the directors in assessing the steps they need to take in order to minimise loss to creditors. Contingency planning should also be considered in advance of any formal insolvency.
Deliverability of plan
Taking all of the above into account, the directors will no doubt need to put together a plan to navigate the coming months and any financial issues which may arise during that period. That plan will necessarily evolve as circumstances change. However, the key question which directors should continually ask themselves is whether they reasonably consider that the current restructuring/reorganisation plan is deliverable. As soon as that plan is no longer deliverable, directors will need to reformulate the plan accordingly (which might include filing for formal insolvency proceedings).
Create a paper trail
Given the current uncertainty, it is important that directors regularly document board meetings which set out the company’s current financial position, the proposed plan (and its deliverability) and the rationale for the decisions that are being made by the board at any given time.
It remains to be seen whether, as is happening in some other jurisdictions, steps will be taken to temporarily suspend some of the obligations imposed on directors. For now however, directors continue to face a number of challenges.
The current situation clearly poses significant challenges to businesses and their directors. If you have specific questions or would like to discuss these topics further, please contact Andrew Eaton.