The onset of the Covid-19 pandemic has forced companies to be agile in responding to the acute decline in business activity and commensurate revenue.
From every angle, this is unchartered territory for government, banks and employees. This level of uncertainty and the added responsibility and stress is no less relevant for directors of enterprises in North Canterbury tasked with navigating their business and employees through these difficult times.
In adapting to the change in the business environment, directors are being forced to consider restructuring their businesses on both operational and financial terms. The focus is to protect the viability of the enterprise, retain value and position the company for a future uptick in business activity.
Directors will need to identify underlying causes of operational underperformance and to develop and implement a strategy to turn these inefficiencies around. Operational restructuring however does not take place in a vacuum and there are a host of financial decisions to be considered in parallel to seeking operational efficiencies.
The directors in implementing a restructuring process, need to have confidence in the financial information and data concerning the business’ trading activities and for robust forecast scenarios to be prepared. Once this is done, the immediate priority will be to stabilize the cash flow position as soon as possible as there are distinct benefits in acting early.
If the business is underperforming, directors ought to consider an operational restructure together with refinancing, sale or partial sale of dormant or underperforming assets, succession planning, etc. These plans naturally take time to implement. The directors will need to engage with key stakeholders including employees, financiers, banks and where applicable, government funding agencies. Initiatives will focus on revenue growth, cost reductions and to develop an achievable plan within a prescribed turnaround time.
When implementing the above, directors may avail themselves of a number of relief instruments including wage subsidies, key supplier support, bank relief, landlord relief and in various instances, tax relief.
Whilst having options available to directors in formulating a strategy is good, this can be a daunting process when directors are trying to make the right decisions under severe time constraints and where previous assumptions and data are no longer reliable or applicable.
The question is, what happens to the risk profile of directors when the results of these decisions do not manifest in the positive outcomes that were hoped for?
Generally, under the Companies Act 1993, directors retain a duty not to trade recklessly and a duty not to allow the company to incur obligations without holding a reasonable belief that such obligations will be met. The decision to keep trading and to undertake new or further obligations, will, by virtue of new government temporary “safe harbor” regulations, not result in a breach of those duties between 3 April to 30 September 2020 if the following criteria are met.
(a) The company was able to pay its debts as they fell due on 31 December 2019;
(b) The directors (in good faith) consider the company to be facing or likely to face significant liquidity problems in the next 6 months as a result of the Covid-19 pandemic; and
(c) The directors (in good faith) consider that the company will be able to pay its debts as they fall due on or after 30 September 2021 (ie this is an interim trading position).
To secure the benefit of these “safe harbor” provisions, the directors must be able to generate robust short-term and long-term financial forecasts, engage with creditors to secure creditor approval and to establish with certainty that the company was cash flow solvent on 31 December 2019. Directors should seek accounting advice and assistance from financial and legal experts to ensure compliance with these requirements.