As we approach the end of the 4th week of lockdown within the UK, it is an opportune moment to review what steps company directors and/or business owner should have already taken and what they may expect in the coming few months.
What should you do now?
By now, all directors and business owners should have undertaken a full review of their business including:
- A full financial review with expenditure being reduced and an income stream maintained to ensure that the cash-flow of the business is sufficient;
- A full review of debtors and steps taken to ensure that payment is made or at least repayment terms are in place;
- Similarly, creditors of the business should have been contacted to negotiate any change in terms that are required.
On 28th March 2020, the government announced a temporary suspension of the wrongful trading provisions contained within the Insolvency Act 1986. This was back dated from 1st March 2020 and the suspension currently remains in place until 31st May 2020. The intention appears to be to give directors some comfort that they will not face a claim for wrongful trading by any subsequent Liquidator of the company.
However, directors should still exercise some caution. Practical steps that should be taken including:
- Maintaining a clear record of any decision making process;
- Conducting board meetings regularly;
- Treating, where possible, all creditors equally.
Credit control and getting paid
Over the next few months, continuing to get paid will be critical to all businesses. The impact of COVID-19 will be used by many businesses as a reason not to pay. For many this will be a genuine reason; others will try to exploit this to extend already over-stretched (and often un-agreed) credit terms.
We anticipate seeing the following steps being taken over the next few months:
- Firmer credit control procedures being implemented and enforced if need be;
- A review of contract terms especially payment terms;
- More analysis as to whether to provide goods and services to particular organisations without some financial safeguards being put place;
- Companies perhaps being selective about who they do business with.
Winding Up Petitions
Those businesses that were, prior to the pandemic, habitually late payers will find it hard it to get credit terms. It is doubtful that the suspension of the wrongful trading provisions will afford much protection to directors of such companies.
Those businesses are also more likely to have action taken against them. These steps could include being served with a Statutory Demand as a pre-cursor to the presentation of Winding-Up Petition. Whilst the courts have suspended the hearing of Winding Up Petitions until 17th June 2020 (at the earliest), the service of a Statutory Demand should still be taken seriously.
There is nothing currently preventing the presentation of Winding Up Petition and even though it would not be heard until much later in the year, it will still create a number of problems (most likely fatal) for a business.
These are unprecedented times, with some contractors within the construction sector being unable to rely on COVID-19 as Force Majeure event within their contract. This means that the contractors will have to continue providing labour and materials to sites. They are facing the moral dilemma of wanting to look after their workforce whilst facing the real possibility of being in breach of contract and facing a substantial claim from a larger organisation with deeper pockets.
In moving forward, directors and business owners need to create clear lines of communications with staff, customers, suppliers and lenders. Above all, if in doubt, seek professional advice.
If you require advice on any commercial litigation matters, our teams are here to support you via phone, email or video conferencing.
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