It is evident that COVID-19 is already having a devastating effect on Irish businesses, some of whom have had to close their doors. Companies and in particular, company directors, need to seriously consider how they will survive this challenging time and address the risks that may save their business from potential insolvency.
RBK Restructuring and Insolvency Partner, Brendan O’Donoghue, examines some key areas companies should consider to ensure they are fully prepared for the difficult weeks and months ahead.
Companies should review key contracts with both their customers and suppliers. This review may include how to best protect the company in respect of both existing contractual arrangements and those under negotiation. It is important for the company to form a view on the terms of those key contracts and whether same can be negotiated with the contracting party(ies) to alleviate pressures on the company. This may include the extension or reduction of credit terms, as the case may be, or strengthening key clauses (e.g. measuring of deliverables or retention of title clauses).
With very few sectors sheltered from the impacts of COVID-19, we expect that customers and suppliers will be open to discuss measures which will ensure a continued working relationship going forward.
An immediate review of your company’s insurance cover is crucial element in reducing insolvency risk arising from the current pandemic. Business interruption, employee compensation, public liability insurance may facilitate your company in mitigating some risk. It is advisable to contact your insurance broker at an early stage to identify what coverage is in place for your company.
Contracts may be terminated by invoking force majeure clauses, should they exist, in respect of events occurring which are outside of the control of the contracting parties. Force majeure clauses differ from contract to contract so each individual agreement will need to be considered to ascertain if COVID-19 is a designated “force majeure event” and, if so, what requirements will be necessary to be satisfied to successfully invoke the force majeure clause to protect the interests of your company. If the contract does not contain a force majeure event, a party could still claim that they are entitled to terminate the contract as it has been frustrated.
Directors’ duties and obligations developed over time through general principles of law were formalised and brought together in an inclusive code in the Companies Act 2014 (the “2014 Act”), which provided greater clarity for directors. In addition to clearly identifying the general duties of directors the 2014 Act clearly outlines the fiduciary duties of directors to include acting in good faith in what the director considers to be in the interests of the company, acting honestly and responsibility in relation to the conduct of the affairs of the company and exercising due care, skill and diligence.
In light of the current environment that we as a business community find ourselves in, some companies may in the coming weeks and months face potential insolvency. It is at a time like this that the fundamental duty of a director to act in the best interests of the company will be tested.
This is not to suggest that a company shut down at the first sight of economic difficulties, however it does mean that difficult decisions will have to be made, judgment calls on the ability of a company to fulfil commitments to repay its debts as they fall due may arise and a director’s duty to his or her company will need to be centre stage.
While decision making should always be clearly documented, trading in times of greater risk or potential insolvency puts greater emphasis on the need to accurately document and record decisions made by the directors in a timely manner.
Where the risk of insolvency becomes a reality, we recommend that company consider:
- reviewing credit terms with customers, including retention of title clauses,
- addressing debtor arrears position,
- identifying alternative suppliers for goods and services which are key to its operations,
- engaging with key employees to provide re-assurance as to job viability, as appropriate,
- laying-off non-essential employees(both temporary and possibly permanent), and reviewing payment obligations, including early engagement with trade creditors, financiers and banks.
Directors should keep abreast of all announcements by Government, designed to alleviate the burden on struggling companies. Initiatives include the introduction of simplified unemployment payments for employees (including payments possible through employers) and measures agreed between the Minister for Finance and Public Expenditure and Reform, the country’s retail banks and the Banking and Payments Federation Ireland. However to date these fall somewhat short of comparable actions being introduced in other EU countries.
Details of such measures are available on www.gov.ie.
Liquidation and Other Options
While the current pandemic may give rise to the decision for an already-unstable business to cease its trade and liquidate, directors should bear in mind that the appointed Liquidator will be charged with investigating the collapse of the company, having regard to the conduct of the directors during their tenure as directors. In effect, the Liquidator’s look back will include pre-pandemic periods. Equally, consideration should be given to the serious implications of insolvent, reckless and fraudulent trading.
Directors who are concerned should obtain professional advice from their existing legal and financial advisors and Insolvency Practitioners.
Additionally, examinership is also be an option to consider where a company is nearing the point of trading while insolvent though still having a prospect of survival. This process affords a business protection from its creditors for a period of up to 100 days and thereafter, the opportunity to emerge from the brink of liquidation to becoming a viable business again. The period of protection can be further extended at the discretion of the Court but only in exceptional circumstances.
The situation for companies in Ireland and internationally is changing day-by-day. In such uncertain circumstances, all business should conduct early-stage analysis of the key points above and ensure they have a plan in place to minimise or mitigate the potential implications of COVID-19.
If you have concerns about your business and the potential or actual impacts of COVID-19, please feel free to contact me or your usual point of contact in RBK to see how we might assist you.