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This is inevitably a challenging time for many company directors throughout Northern Ireland and beyond. Businesses have been faced with a quite unprecedented set of social and economic circumstances due to the Covid-19 pandemic and now, as lockdown has eased and restrictions begin to be lifted, the focus turns to how those businesses that have been most severely impacted by this crisis will evolve. Directors are no doubt busy strategising how to best ensure their company’s immediate short term stability and in time their longer term growth and prosperity.
According to the latest Quarterly Economic Survey published by the Northern Ireland Chamber of Commerce and Industry and BDO earlier this month around 77% of members confirmed that they had furloughed staff and 12% have had to make redundancies. Furthermore, just over half of members highlighted their intention to reduce staff levels post Covid-19 and the implication from almost 1 in 5 members was that they felt their business was ultimately unlikely to survive.
Similarly, the PMI report recently released by Ulster Bank for June 2020 claims that “Companies remained pessimistic regarding the 12-month outlook for output amid concerns about the long-term impacts of Covid-19.” The stark reality of the impact of the pandemic on the private sector is evidenced in the further reported reductions in output, new orders and employment.
During this slow emergence towards regaining economic activity it is imperative that directors of limited companies tread carefully through the legal minefield of their duties and obligations and avoid common pitfalls associated with insolvency such as wrongful trading and preference payments which could lead to disqualification and personal liability.
A director is normally under a duty to act in the best interests of the company and its shareholders. However, this is the position when the solvency of the company and its long term future is not in question. The position changes dramatically when the company becomes insolvent or enters the zone of insolvency.
Below are some practical tips that may serve as a useful reference framework for guiding directors through this difficult period and hopefully towards a successful return to trading.
In simple terms a company is deemed to be insolvent if either the value of its liabilities exceeds the value of its assets, commonly known as the ‘Balance Sheet Test’, or if it is unable to discharge its liabilities as they fall due, commonly referred to as the ‘Cash Flow Test.’ If a company satisfies either of these tests then it is technically insolvent however it is not uncommon for a financially distressed company to satisfy both tests at the same time.
A period of insolvency can sometimes be a fleeting or temporary event where the company can ride out the financial difficulty and continue trading healthily into the future. Directors therefore have to be extremely vigilant at identifying when their company’s financial problems are more than just a minor bump in the commercial road.
The following is by no means a complete list but directors should consider the following:
It has never been more important for directors to avail of early professional advice to ensure that they are informed and supported in making those difficult and delicate decisions in relation to their company. The earlier advice is sought, the more options are normally available to you and the more time you will have to fully explore those options.
TLT have a team of insolvency and restructuring experts with the experience to support local businesses in finding the right solutions by providing clear and practical advice.
If you would like to arrange a consultation with a member of our team please get in touch.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.
23 July 2020
Insights 18 JULY 2022