After 2 months of lockdown last Sunday the UK Prime Minister announced the conditional plan to get employees who cannot work from home back into the workplace and the framework within which the we may take tentative steps to increase societal connections.
On Monday the UK Government published its 60-page Covid-19 Recovery Strategy dealing with how the UK might move from present lockdown to the “ New Normal”.
And on Tuesday there was more from the UK Chancellor addressing ongoing financial support.
Obviously the ability to begin rejuvenating businesses that have been mothballed for the past couple of months is good news but corporates should proceed with caution as they take steps to revamp the workplace.
There are plenty of uncertainties for many businesses particularly around the practicalities of gaining or keeping the confidence and support of employees around their personal safety whilst simultaneously reactivating operations. Other uncertainties relating to health and safety, trade and credit insurance and on matters specific to sectors including – real estate, construction, retail, leisure, the position in different jurisdictions across the globe and the staggered nature of the global recovery. You can access our blogs and client alerts on many of these matters here.
The following points are the sorts of matters any plan across any sector should include.
A sensible start point is working out the demand for products and whether supply chains remain intact and are now adequate to meet demand.
To this end it is essential that businesses communicate with existing customers to understand their needs and how the staggered lifting of restrictions will affect them. Directors need to work out what changes can and need to made to their businesses offering – production capability and manufacturing output, online capability and different/better delivery services are just an obvious start point and each business will have its own particular opportunities and challenges.
Having understood the demand directors will conduct the same exercise in relation to suppliers to their business and will want to know how they have coped during lockdown and what they are capable of sourcing and delivering as restrictions ease.
Boards should consider opportunities with regard to alternative sourcing in what will be a very choppy and changing market place. Possibly cheaper sources and definitely seeking to de risk their supply chains by diversification and, where practical, shortening the chain.
Once satisfied there is still a business to revamp then boards of directors will need to carefully and thoroughly address the business’s cash position. They need to work up Plans A B and C – best and worst case scenarios and something in between.
There will a lot of pressure on profitability being passed through from all directions. Thought must be given to any deferred liabilities –the obvious one being rent – plus any newly acquired debt taken on to help manage through the fallow period of lockdown.
The forbearance being exercised by financiers will come to an end so lending costs and repayments need to be factored in. Protective legislation may be eventually repealed or become obsolete for instance in relation to anxious or opportunistic creditors and their ability to issue winding- up petitions.
No new financial business initiatives were announced by the Chancellor on Tuesday but it is clear the present support systems will have to wind back over time.
The Job Retention Scheme is in place until 31 October and possibly some allowances in the future to taper the furlough relief to allow partial return to work but will that falling away coupled with the new shape of businesses call for redundancies?
On a more positive note the UK Government announced today – 13 May – that it would further support businesses through a trade credit insurance guarantee saying that trade credit insurance provides cover to hundreds of thousands of business to business transactions, particularly in non-service sectors, such as manufacturing and construction.
The government’s guarantee would assist in insuring sellers against buyers defaulting on payment and it should give businesses more confidence to trade with one another as the economy kicks back in.
As they dust off the books finance directors should identify likely bad debts and fully provision, check debtor days as they will almost certainly have slipped during lockdown. Consideration should be given to reducing credit terms perhaps ask for cash on delivery and there may be potential to increase prices. At the end of the day the books need to be balanced.
The likelihood is things may not look great and directors need to be mindful of their wider duties.
The focus of directors’ duties shift when they are no longer confidant that the business will remain solvent.
A business is statutorily insolvent when it cannot meet its debts as they fall due or when its assets are less than its liabilities. At that point the directors’ duties switch to a requirement to take decisions for the benefit of the company’s creditors as a whole.
Companies financial positions across UK plc will almost certainly not look as strong as at the end of 2019. Auditors will find it more difficult to sign of going concern statements and there will be impairments. If a company is insolvent then duties owed to shareholders will be secondary. Whilst they remain relevant directors should not be influenced by any power of shareholders to remove them when the directors are looking at tricky business decisions. In an insolvent situation directors must act in the best interests of the company’s creditors
Finally it is worth emphasising that the instinctive desire by all parties to assert rights against defaulting counter parties should be expressed carefully. On 7 May the Government issued Guidance on responsible contractual behaviour in the performance and enforcement of contracts impacted by the Covid – 19 emergency.
In essence it is a document flagging up to all that parties to contracts impacted by c-19 should act responsibly and fairly, by support the response to Covid-19 and protect jobs and the economy.
It extols individuals, businesses (including funders) and public authorities who are parties to active contractual arrangements which are materially impacted by Covid-19 to consider their behaviour as part of the national response to the public health emergency and strongly encourages responsible and fair performance and enforcement of contracts stating that the circumstances in which we collectively find ourselves are unprecedented and exceptional.
The guidance is clearly designed to discourage what it describes as a “plethora of disputes”. The underlying message is clear: use your energies and your money to get the economy going again and not to sue each other. The Government says it will keep behavior relating to contracting under review, and there must be a risk that pursuing COVID-19 related disputes in a way which is judged to be unreasonable could lead to some form of regulatory intervention, and certainly to reputational damage. The risk is likely to be significantly increased for businesses that have received taxpayer funded support.
The guidelines expressly state that they do not override contractual rights or the law of the land and so we can be sure the Courts will not consistently factor in this guidance. However litigation risk will rise and all judges factor justice and morality into their thinking where the law is at all unclear or allows for a range of outcomes……as it often does.
So corporates should pay attention to the overall morality of any claim when estimating prospects of success. Further, many contracts impose obligations of “reasonableness” or “reasonable endeavours” and it is very likely that the Courts will interpret those words through the prism of this guidance whilst it applies. Companies in non or lightly regulated sectors and may not be heavily impacted by this, but there will be reputational issues to be factored in when assessing claims and defences.