COVID-19 – Top 5 Tips for Directors of Companies Facing Business Difficulties
07 April 2020
Irish companies are facing challenges with the sudden changes imposed on their businesses as a result of the impact of COVID-19. Some may be experiencing cash flow difficulties; others may have had to temporarily cease trading altogether.
Directors are responsible for managing their company’s affairs. This requires them to identify and navigate risks, and to ensure that appropriate strategies and where necessary contingencies are in place to anticipate and deal with such risks.
Failure to adequately do so may contribute to a company’s reputational damage and poor financial performance, and can also lead to director restriction or disqualification.
We provide five helpful tips for directors during these uncertain and challenging times.
Tip 1: Maintain internal governance
Regular board meetings should be held to address a company’s financial performance. Directors should actively engage in the meetings, offering suggestions and solutions, and detailed minutes should be maintained as evidence of this. Outside advisors could be asked to present to and advise the board as required.
The vast majority of companies can hold board meetings by telephone or by other distance communication - see our previous article here.This will enable directors to meet to take decisions even in times of restricted movement.
Directors should be aware of the indicators of financial difficulty in order to assess their company’s position. Necessary actions will depend on the business of each company and how affected it is by the current challenges, but may include the preparation and close analysis of management accounts, stress-testing the business and ensuring that the company’s records and books of account are up to date and accurate.
Tip 2: Review whether your business is viable
The decision to continue trading should be constantly reviewed by the directors. It should be based on accurate and up to date financial information. Indicators of a non-viable business in the current climate might include a squeeze on cashflows or vital suppliers and customers becoming insolvent.
If it is determined that the business is viable, the directors should consider implementing a programme with a view to minimizing expenditure and maintaining a sufficient cash flow.
Tip 3: Seek professional advice
If the directors are concerned as to the financial performance of their company, or there is an uncertainty as to its viability, immediate professional advice should be sought. It is important to involve advisors at an early stage, and to keep detailed records of this involvement along with the directors’ deliberations in minutes of the meetings which the directors hold to reach their decisions.
These board minutes are good evidence that upon becoming aware of the situation, the directors took proper and timely steps to address the situation. It indicates that that the directors were performing their duties to the standard required of them and may help them to avoid or defend any later criticism of their actions.
Such professional advice may relate to the continued viability of the business, funding, potential redundancies and payments to creditors.
Tip 4: Consider your creditors
In a period of financial uncertainty, insolvency may be a possibility. Where the directors become aware that their company is or is likely to become insolvent, they must have regard to the interests of the company’s creditors, and measures should be taken to preserve the assets of the company to minimise creditors’ losses.
Directors should assess the company’s outstanding debts. In the event that it is decided to pay one creditor or class of creditors over the others, detailed minutes must be made around this decision making and the reasoning behind it.
In choosing to make a payment to one creditor or class of creditors over others, directors run the risk that this may be classed in any subsequent insolvency as an unfair preference and the recipient treated as the surety of the debt in question.
Directors should also be aware of the court’s general power to order the return of assets improperly disposed of by a company that is in the course of being wound up on the application of a liquidator, creditor or contributory. The test is essentially whether the company has been deprived of something it should otherwise have been entitled to. An example would be where company assets are disposed of at an undervalue
Tip 5: Take steps in an insolvency
The directors should consider whether their company can pay its debts as they fall due and whether its assets exceed its liabilities to determine their company’s solvency.
In the event that the company is in financial difficulty, it is possible for the directors, or the company itself, to apply to court for the appointment of an examiner. The court must be satisfied that the company and all or a substantial part of its business, has a reasonable prospect of survival as a going concern.
If there is no reasonable prospect of the company surviving and it is considered not to be in the best interests of the creditors to continue trading, a decision should be taken to place the company into liquidation.
If the company continues to trade while it is insolvent, the company may be found to have been trading fraudulently or recklessly. In these circumstances, directors can be found personally liable for the debts and liabilities of the company, without limitation.
Now more than ever with the stresses placed on the operation of companies’ businesses as a result of COVID-19, directors must display strong leadership and navigate their company through the challenges currently faced.
It is essential that directors are fully aware of the performance of their company, and are aware of the parties to whom they must have regard in fulfilling their duties as directors.
If you would like assistance or advice in managing risks from a board of directors’ perspective, please contact a member of our Corporate Governance & Compliance team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.