Steps that Directors should consider in fulfilling their duties
By Robert Lyons, Excello Law
June 22 2020 - The coronavirus crisis has seen both governments and major corporations caught off guard. Now that there are indications that the initial wave of the pandemic may be passing in the UK, companies need to take stock, adjust to new realities and prepare for the future.
At the outset of the pandemic, well advised Boards of directors would have taken a number of steps to safeguard their employees, build in operational resilience and mitigate their business risks. These steps are likely to have included establishing a coronavirus 'officer,' 'sub-committee' or 'war cabinet' with a brief to keep abreast of regulatory change, advice and guidelines, to devise a bespoke plan which addresses the specific operational needs and priorities of that business, to plan for contingencies and to stress test different scenarios.
Now would be a good time to review and assess how effective the internal governance model has been. Is the 'war cabinet' made up of the right people, both in terms of skill set and internal authority? Is it clear who can make immediate decisions? Are there clear terms of reference for decision making? What happens if a key decision maker becomes ill? Are there systems in place to triage and prioritise risks? Can things be done better?
In a rapidly changing business environment, key stakeholders need reassurance and clarity, which makes an effective communications strategy more important than ever. Mainstream and social media should continue to be used intelligently and proactively to address potential customer concerns, regular virtual meetings may be needed with key investors, customers and suppliers and strong internal communication channels need to be in place to ensure that employees are fully informed and aware of their responsibilities.
Employment and Health and Safety issues
Companies must remain cognisant of their fundamental legal duty of care to ensure that appropriate measures are taken to safeguard employees' health and safety in their place of work.
Current government advice remains that staff should work from home if at all possible. If employees are to return to work, employers must complete a 'risk assessment,' take reasonable steps to prevent harm in the work place and follow government guidelines on safer working. These guidelines reflect different work environments and each business needs to ensure that it complies with each set of guidelines relevant to its business. The guidelines recommend active engagement with employees in the health and safety decision making process since it is often the employees on the shop or office floor who have the best understanding of the risks involved. If a company is a landlord, it may also have to consider health and safety issues for its tenants.
To facilitate both working from home and the gradual transition back into the work place, Businesses should not only update their HR policies to reflect new policies and guidelines on home working, flexible working, leave and absenteeism but also to set out the new policies to be put in place in and around safe distancing.
The need for Businesses to monitor their financial health through regular solvency and liquidity stress-testing is especially important at this time. Given the unprecedented economic situation, it is vital to update cashflow modelling on a regular basis with revised short and mid-range to longer terms cash flows, capex etc. Businesses also need to update their financial forecasting to determine what levels of borrowing may be required, and when, and how existing and future borrowing will be serviced.
Businesses should also be regularly reviewing their existing bank facilities to assess the risk of potential defaults and cure periods, headroom in financial covenants and potential breaches of them. They should also be assessing whether they need to seek bank consent for interest or capital repayment holidays or amendments to facilities or waivers of breaches or increased borrowings. They should consider the optimum time to approach banks.
Companies' costs bases should be reviewed and consideration given as to whether certain costs can be eliminated or deferred. Landlords could be approached for potential rent holidays.
For many businesses, Government Covid-19 support has been helpful in mitigating the economic impact of the pandemic. It is important therefore that the level and extent of Government support be monitored regularly to ensure that maximum benefit is obtained.
However, at some point, difficult work force decisions may need to be taken over and above furloughing employees. Part time working, temporary layoffs, unpaid leave, reduced hours and/or wages, zero hour contracts and even redundancy may need to be considered. If these steps are to be taken, it is important that timely professional advice is taken to ensure that any such steps are lawfully carried out and executed in a way that will reduce the risk of legal action against the business.
Consideration should also be given to the robustness of existing supply chains, while possible alternative suppliers should also be researched.
Material contracts should be reviewed for termination rights. Would it be in the company's best interests to invoke force majeure rights or to argue frustration of contracts? Is there any exposure to counterparties seeking to terminate for force majeure or frustration? If so, now is the time to start contingency planning, with the input of legal advice as required.
Care should be taken to avoid giving inadvertent contractual variations or waivers. Any relaxation of standards, timings or volumes should, wherever possible, be set out in writing with the extent, scope and legal effect of any agreed relaxations being made clear.
Other matters for the checklist
- Check whether insurance claims are possible, such as claims for business interruption
- Consider accounting issues from going concern to asset impairment or increased liabilities
- Revisit cyber security and data protection risk strategies, taking account of increased homeworking. Check the National Cyber Security Centre's recently published guidance.
- Engage with advisers particularly financial, legal and HR. Record and minute the advice given and the reasons for decisions made.
About the author
Robert Lyons is a specialist business and corporate lawyer at Excello Law. www.excellolaw.co.uk