The outbreak of the Coronavirus has caused a serious and evolving health crisis which will continue to present significant challenges to our everyday lives. Furthermore, the implications for many businesses are likely to be profound.
Coronavirus will have a growing impact on the economy and businesses are going to face pressure with the breakdown of supply chains, cash flow issues, labour shortages and disruption to manufacturing.
The Government has announced a £350bn bailout to help businesses (in addition to the £12 billion worth of assistance announced in last week’s budget). However, this is an evolving situation and only time will tell whether this will be sufficient to prevent many business tipping into insolvency.
Directors are under a duty to act in the best interests of the company and its shareholders. However, once a director forms the view that the company is insolvent, on a cash flow and/or balance sheet basis, his/her duty is to act primarily in the interests of the company's creditors. If there is no reasonable prospect of avoiding an insolvent liquidation or insolvent administration, a director’s obligation is to manage the affairs of the company with a view to minimising the potential losses to creditors. As the uncertainty of the impact on the economy continues, we advise directors to:
- Maintain accurate and up-to-date company financial records and consider the potential impact on creditors of the decisions they take.
- Continually monitor and review the financial state of the company. Directors should review the company’s balance sheet and cash flow position and also consider the need to increase the frequency of management accounting and internal financial reporting.
- Consider ways to reduce expenditure, if necessary.
- Hold frequent board meetings convened specifically for the purpose of reviewing the company's financial position and keep proper minutes of those meetings, noting any decisions made and the reasons for them. Any contingency plans that are implemented and/or steps taken to mitigate the effects of Coronavirus should be carefully documented so that it is clear how and why those decisions were taken.
- Continually monitor market developments and set up alerts in order to keep appraised of such developments.
- Take professional advice aimed at reviewing whether an insolvency process is inevitable or whether there is some way of resolving or mitigating the company's financial difficulties.
