COVID-19 is an unexpected shock for many businesses. Some businesses are being significantly affected, particularly those in the travel and hospitality sectors. We consider some of the options open to otherwise good businesses facing cash-flow and other financial issues as a result of COVID-19.
How are governments dealing with COVID-19
In an effort to delay the spread of COVID-19, governments have been implementing isolation, quarantine and social distancing. Naturally, businesses and individuals have also been implementing a degree of social distancing, even where that is not mandated.
Logically, in the first instance, this affects the travel and hospitality sector, with limits on mass gatherings and conferences and meetings being cancelled.
How long will the economic consequences of COVID-19 last?
As yet, there appears to be insufficient data for anyone to accurately predict how long the problem will last. However, it appears probable that it will last several months. A recent article in the Lancet predicts that: “If measures are relaxed after a few months to avoid severe economic impact, a further peak is likely to occur in the autumn”.
Formulate a plan
Without delay, you should appraise how COVID-19 will affect your business and how long those effects will last.
Having done so, the plan may show that your business will become unable to pay its debts before the crisis is over. If that is the case you should not panic.
In the first instance, you should explore:
What supports may become available from the Government
What accommodation might be possible to reach with your creditors and suppliers
Whether you need to enforce contracts or debts more forcefully
Whether you need to scale back somewhat, and
Whether you need to consider more formal restructuring options, even if only as a tool to negotiate with your creditors
It is important to be aware of the fact that, if your business is verging on insolvency, the directors owe a duty not to materially worsen the position of the creditors of the business, as a body.
This period is sometimes referred to as ‘the twilight zone’ and can be a challenging time for directors as they must balance their duty to creditors with the objective of solving the company’s financial difficulties.
The courts have held that it is not in the interests of the community that a company ceases trading whenever it appears there is a significant risk that it will become unable to pay its debts. To make a finding of reckless trading against a director, the court must determine that he/she knew or ought to have known that their actions or those of the company would cause loss to creditors.
In this context the courts have taken the view that “loss” does not include a minimal loss or a minimal percentage increase in an inevitable loss. Therefore, even where a company is insolvent it may continue to trade, with limited risk to the directors, provided the directors cause no or minimal further loss to the creditors and they reasonably believe that the company can recover financially.
Courts also accept that business decisions are made at a point in time and such decisions are usually not assessed by a court with the benefit of hindsight, once they are made in an informed and prudent way.
Accordingly, to properly carry out their duties in these circumstances, directors of a company verging on insolvency should insist on:
Delivery of frequent management accounts to enable the directors to form a view
Sensible controls on costs, pricing and staffing levels to maintain cash flow
Frequent board meetings with careful minutes of all decisions taken
Proper distribution of responsibility, especially proper delegation of the duty to keep books of account to a competent person
Appropriate outside professional advice, and
Appropriate communication to creditors with a very careful assessment of any payments that are made to creditors
If there is a divergence of opinion amongst the directors regarding the steps being taken or, more significantly, the prospect of the company’s financial position improving, then it may be advisable for individual directors to take separate advice to protect their own position.
Is restructuring an option?
As the crisis unfolds, a business (or a portion of it) may find itself in a position where it is unable to trade profitably but could be returned to viability if, for instance, it:
Renegotiated or avoided the obligation to pay its debts in full
Closed an office or factory, either temporarily or permanently
Ceased producing certain products
Renegotiated leases priced above the current market rate
Renegotiated the terms of its bank loans, or
Made a number of staff redundant
Irish restructuring law and especially examinership can, in appropriate circumstances, facilitate a business in taking any or all of the above steps, if they result in the survival of the company and all, or part of, its undertaking as a going concern.
If examinership is suitable, it can result in the company exiting from the process in just over three months with no legacy debt and a viable future business.
Equally, as examinership enables some or all of the foregoing steps to be taken, it is sometimes possible to negotiate a favourable outcome with creditors and other third parties against the backdrop of what could be achieved in examinership.
Examinership is not the only option and all forms of restructuring should be considered.
However, if the current and on-going situation has an immediate effect on the business and its cash flow, then the immunity from creditor action that is offered by examinership may be attractive.
Businesses with no reasonable prospect of survival
Regrettably, there probably will be some casualties.
Therefore, if your business finds itself in a position where there is no reasonable prospect of survival, it is incumbent on you to cease trading, incur no further debt and wind up the business as soon as this becomes clear.
However, even in the bleakest case where insolvent liquidation of the company is inevitable, there may still be options for the future. For example, although there are certain restrictions, there is usually nothing to prohibit the directors of a company acquiring some or all of the assets of the company from the liquidator. This may be something to consider if there is a viable underlying business that could benefit from a fresh start.
But, in order to preserve this as an option it is imperative that directors act in the best interests of the company and/or the creditors in the period prior to liquidation as any attempt to derive personal gain to the detriment of the company or creditors may expose an individual director to personal liability.
Cash gives you the freedom to act
One key point to keep in mind from the start is that you need to avoid running out of cash before completing any necessary restructuring.
If you allow a current cash positive position to be eroded simply supporting on-going losses, or worse simply pump cash from outside a company into the company to support such losses, you will lose the freedom to use that cash to complete any necessary restructuring.
As with any plan, consideration of the possible impact of COVID-19 is key to the solutions.
However, the situation remains uncertain.
Any business that believes COVID-19 could have a significant impact on its viability should consider the range of tools under Irish law and, to the extent possible, retain the flexibility to react quickly and implement the most appropriate contingency plan for the situation as it unfolds.
The content of this article is provided for information purposes only and does not constitute legal or other advice.