The legal world of company restructurings and insolvencies is rapidly evolving and in a world of COVID-19 and the associated uncertainty it brings, it has never been more difficult for directors to ensure that they are properly discharging their duties. Gawain Moore, Partner in the Walker Morris Banking, Restructuring & Insolvency team, shares his ten top tips for directors whose companies are facing financial challenges in the current economic climate.
- Seek advice at an early stage. Company directors have a wide range of responsibilities under statute, regulation and the common law. Directors should ensure that they understand them by talking to a specialist quickly.
- Don't panic. Provided directors take reasonable, sensible decisions and follow professional advice, it is very unlikely they will face personal liability.
- Information is key. All directors, not just the FD, must ensure that they understand the financial and trading position of the company, so they can take informed decisions on what is the best course of action for the company and its stakeholders.
- Hold regular board meetings. If the company is in severe financial difficulty, these may need to be daily or even twice daily at the start and end of the day's trading. At those board meetings, the financial and trading position should be reviewed along with any particular creditor pressure and threat of insolvency proceedings or other action which may threaten the future of the company.
- Stakeholder engagement. Engage with the key stakeholders at appropriate times, whether that be shareholders, lenders or key trading counterparties.
- Focus on cash. Even the best turnaround plan will fail if the business does not have sufficient liquidity to see it through.
- Understand the problem. What is it that has led to the need to consider a turnaround plan? Is it a short-term problem, like COVID-19, from which, with sufficient liquidity and provided its market hasn't changed, the company should recover? Or is there a fundamental problem with the company's business?
- Create a positive story. Once directors have decided on a turnaround plan, how can it be framed as a good story which stakeholders will understand and support? The story needs to be backed up by clear and realistic forecasts, based on credible evidence. Remember to involve the company's lenders, as if secured, they will control the assets. The type of lender may be relevant here in relation to the timing and nature of the approach. Is it a high street bank that may be more sensitive to adverse publicity if they are not supportive, or a 'loan to own' type lender who may have ulterior motives. Generally, there is likely to be a greater prospect of lenders buying into a turnaround proposal if the company is open and engages with them at an early stage, rather than being presented with a fully worked up plan they have not had a chance to input into and which may have come as a surprise.
- Consider fresh equity. Fresh equity should also be considered as an option, either from existing shareholders or new investors. How this will work and the costs and risks involved will depend on the nature of the company and its capital structure.
- Seek professional advice. As mentioned, it is crucial to involve lawyers and other professional early on for two reasons. First, to ensure that directors are aware of and understand their duties and risk of personal liability. As noted above, provided directors take reasonable and sensible decisions and follow professional advice, it is very unlikely they will face personal liability. Second, there is often a solution for distressed businesses that will avoid the company entering administration or liquidation, but it will take some time to implement. If the first advice the directors take is a week before the company runs out of cash, there is little time to consider and implement a solvent restructuring.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.