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Coronavirus and Financial Distress - Five Top Tips for Directors and Business Owners

on Thursday, 19 March 2020.

Over recent weeks, all of us have had to grapple with the potential impact of the current severe strain of 'Coronavirus' known as 'Covid-19' and the impact it may have on us, our families and our businesses.

Although the position in the UK is changing rapidly, directors should think seriously about how they might mitigate the risks associated with the inevitable business disruption in the coming weeks and months.

What It Means For Businesses In the UK

Preparations are being made throughout the country to mitigate any potential losses caused by disease-related disruption such as the implementation of flexible working strategies to ensure continuity of trading and productivity. As well as some of the measures introduced by the Government in the March budget, such as access to Government backed loans and reduction of business rates, in each daily briefing given by the Government new and improved proposals for businesses are being introduced. These measures, however, will not be suitable for all businesses. Remote working, for example, will be of limited use to the many sectors which rely on staff being physically present to serve customers, manufacture products or provide services.

Business owners are, understandably, increasingly concerned about the impact that Covid-19 could have on solvency and their business' continued ability to trade. The entry into administration of airline company Flybe in late February, is a timely and high profile reminder of how the sudden onset of an unexpected event, such as this large scale outbreak can be the final straw. Which leaves a business, albeit one which was already in a fairly precarious position, with little option but to enter formal insolvency.

It is therefore important for business owners and directors to be aware of their obligations and duties in these trying times, as well as being aware of the options they may have available to them if things do go wrong.

What Should Directors Be Doing Now and Why?

Whilst directors of a company have a variety of fiduciary duties as set out in the Companies Act 2006, in times of financial distress, those same directors have a further duty to shift their focus to ensure that they act in the best interests of the company's creditors.

By ensuring they act in the interests of creditors and by avoiding committing Insolvency Act offences, such as wrongful trading, fraudulent trading, transactions at an undervalue or preferences. Transactions defrauding creditors or misfeasance, directors can avoid personal liability in connection with a later failure of the company.

It is therefore sensible for directors of even seemingly stable companies to take stock in light of the Covid-19 crisis. In order to help we have set out some of our top tips below:

  1. Keep your Financial Records, Management Accounts and Cash Flow Projections Up to Date
    Regularly monitor, review and update these. This will help you understand the financial health of your business and identify when and if insolvent liquidation is unavoidable.

  2. Check your Insurance Policies
    Do you have access to business interruption cover which may assist you? Could staff sickness and office absences be covered by key man insurance which you may have? Work out when and how to notify your insurance provider or broker of any claims.

  3. Have Regular Board Meetings
    The situation is constantly changing - have regular meetings with your fellow directors, discuss the company's financial information and document any decisions you make.

  4. Focus on Cash Collections
    Now, more than ever, it is vital to ensure that income keeps coming through your door. Concentrate on your credit control systems, remind people to make payment to you before invoices become overdue and be clear and persistent with your debtors, particularly in the collection of old and recurring debts. Whilst some businesses are struggling due to the outbreak of Covid-19, other businesses may be impacted less or indeed find that business is booming It is therefore important to understand the nature of your debtors, customers or clients' businesses and perhaps concentrate on income from those organisations who may have greater access to funds in these trying times.

  5. Take Professional Advice - it is important to seek professional advice from solicitors and accountants at an early stage,, to help better understand your business' financial position and how close you are to unavoidable insolvency. Advisers can also help you understand what you should and shouldn’t do in respect of business decisions. Professionals can help you recognise the warning signs of insolvency, understand whether your situation is one you can trade out of, and help you understand the various types of resources which may be out there to help you, such as the Government's Coronavirus Business Interruption Loan Scheme. Advisers may also be able to assist you in negotiating payment holidays, if appropriate, with your key stakeholders.

Take Action

Don’t bury your dead in the sand - ignoring a financial problem seldom means that it disappears. The sooner you act the more options you may have available to you and the quicker you can protect the company's creditors, the business and yourself.

VWV offers a range of services to proprietors, shareholders and directors of businesses in financial distress. Contact Ed Husband, in our Insolvency & Restructuring team, on 0117 314 5233 or complete the contact form below to find out more about how we can help.

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