Covid-19 presents unprecedented challenges to all businesses. Most will be affected by the interlocking issues of falling demand and consequent strain on cash flow. Creditor demands, be they from employees, landlords, suppliers or HMRC may not be met when they fall due (a cash flow test of insolvency). This presents directors with a dilemma; if the company is 'insolvent' on a cash flow basis should it cease operation? Do the directors face potential personal liability for wrongful trading if they carry on but the business eventually fails?
When facing such challenges the director's overriding duty is to act in the best interests of the creditors as a whole. Immediate cessation of business may be extremely damaging to creditors but one cannot simply carry on blindly ignoring the situation and making matters worse. Instead very careful advice is required to plan and implement a turnaround strategy. The directors must therefore constantly ask and assess whether there is a reasonable prospect of the company avoiding administration or liquidation?
As the Government continues to introduce emergency measures to support businesses, such as providing loans of up to £5m via the Coronavirus Business Interruption Loan scheme for SME's and through Bank of England backed guaranteed loans for big business, it maybe incumbent on directors to explore how such debt financing may bridge the inevitable dip in demand and ease cash flow problems. In parallel honest and straightforward discussion with creditors is required, to understand respective commercial positions and to see how far each can 'share some pain.' The role of HMRC and the potential re-introduction of 'time to pay' arrangements will also be key.
Directors actions are viewed objectively on the facts which they ought to know or ascertain, conclusions they ought to reach and steps which they ought to take having regard to what a reasonable director would have concluded in that same position, taking into account the knowledge, skills and experience of that particular director.
How best to avoid liability?
- 1. Act fairly as between all business stakeholders, act honestly and in the best interests of creditors; and
- 2. Plan and implement a strategic course of action that will deal with creditors, making the situation better not worse.
If you follow these two steps you will not be criticised for simply being unable to pay debts in such unprecedented times.
P.S Since this blog was first published on 28 March the Government announced it would be introducing measures which would see wrongful trading legislation suspended from 1 March for a period 3 months
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