Legal advice: the loneliest executive?

The job of a finance director has seldom been harder. In the current climate it seems that it is not enough to simply be managing your own cash flow and profitability, you are often called upon to help your customers’ cash flow by agreeing extended credit terms.

You may well be involved in assisting in re-tendering for a customer’s business; you may be required to deal with the fall out from the insolvency of customers; you will no doubt be needed to assist in difficult budgeting discussions; you may be required to consider redundancies, short-time working, pay cuts or pay freezes; or a combination of all of these. Last, but by no means least, you will no doubt be spending much more time in discussions with your bankers.

As if these demands were not enough, FDs working in listed companies will also be required to consider the obligations imposed upon them by the market and many will have needed to consider whether or not to issue profit warnings during the last year or so. Finally, FDs of businesses of a sufficient size (turnover in excess of £200m or with a balance sheet total in excess of £2bn), will have had to get to grips with the new provisions of the Finance Act 2009 (Schedule 46), imposing further duties and potential penalties upon “the senior accounting officer” of the company.

The multi-faceted and wide-ranging demands placed upon today’s FD sometimes make the job feel extremely challenging and lonely. Where many CEOs are heavily reliant on their FD as a sounding board, an FD can often feel that they have no equivalent confidant or counsellor.

However, the more savvy FD will seek to put in place an appropriate support network of peers and professional advisers. An obvious port of call would be representatives from the company’s auditors. However, some companies may be slightly wary of being too open with their auditors given the statutory obligations placed upon auditors and the concerns many are having at the moment in interpreting “going concern” issues.

In light of this, the FD’s legal adviser can often be invaluable.

Experienced corporate lawyers can advise FDs across a wide range of businesses and will often have come across a number of the issues being faced by an FD while advising other clients. A solicitor’s professional obligation of confidentiality should also give an FD comfort that they can be completely open with their legal adviser.

A company’s legal adviser can also advise on a number of specific areas that have been common during the recession. Here is a snapshot.

Banking arrangements

A common theme of the current recession has been the need for a number of corporates to renegotiate and refinance their bank facilities. Experience suggests that the most successful renegotiation happens when the corporate is open with its bank, approaches it early with regard to any issues and is flexible as to potential changes. For example, if it is a property company and has unencumbered assets, it may well be that offering to put some or all of those unencumbered assets into the bank’s security web will be able to address any loan-to-value covenant shortfalls. Non-property companies could consider whether or not new subsidiaries or related companies that did not exist at the time the facility was entered into could cross guarantee the main borrower’s obligations. Equally the owners of the borrower could consider whether they could stand behind the borrowings as guarantors if they are not already doing so.

Credit terms

Another theme of the current recession has been of customers having cash flow problems and seeking to have their suppliers be part of the solution.

Often the solution proposed by the customer involves a supplier agreeing some form of deferred payment plan. Many suppliers have taken the view that they have little choice other than to accept the customer’s requirements, particularly if they wish to continue their relationship with the customer. However, before simply agreeing such a course of action, a number of issues need to be considered. For example, any agreement as to extended payment terms should be appropriately documented.

The parties should be clear whether or not what is proposed is a one-off variation or a permanent change to existing contractual terms. Clearly, from the supplier’s perspective, the former is preferable. The supplier should also bear in mind that if it credit insures its exposure to customers, any extended credit terms for that customer would usually require the prior approval of the credit insurer. Clearly any credit insurer should be informed about what is being considered at an early stage.

Retendering for Business

Another common feature of the current recession in certain industries (in particular marketing services industries) has been for clients to require suppliers to retender for the business. (It will not surprise readers to note that any retendering exercise seems to usually involve a reduction in the commercial terms payable to the supplier). If you are involved in a retendering exercise it is important to be aware of your existing contractual rights and obligations and to consider these in the light of any retendering.

Clearly these rights should apply until such time as any retendering exercise has been completed and any new contractual terms agreed. If a retendering exercise is unsuccessful, you must be aware of your accrued rights and obligations under the contract in question. In addition, you may be able to take advantage of legislation such as Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2006. These regulations provide that on the change of service provider any employee who was employed for the majority of its working time for that customer will transfer to the employment of the new service provider. TUPE is potentially a very helpful piece of legislation for those who have just lost a major customer.

Nowadays the FD has to contend with the wider volatility of business performance in an unpredictable and turbulent market as well as the usual business concerns and pressures. This is why it is essential for the FD to be able to rely on one constant – an appropriate support network of peers and professional advisers, especially the confidential relationship with their solicitor – that can guide a finance director through the key issues that need to be grappled with.

Dealing with employment issues

In these troubled times, FDs have had as much to do with employee issues as anything else. Many businesses have looked at their payroll costs recently and are considering measures to reduce them. If this is the case you must involve your employees at the earliest possible stage. If you do not have a unionised work force or elected workers representatives in place, you may well need to ensure that workers’ representatives are elected. A dialogue with workers representatives can be helpful when things such as possible redundancies or alternatives, such as short-time working, temporary or permanent pay cuts or the reduction and or removal of certain employment related benefits, are being considered. A key feature of the current recession as against previous ones has been flexibility on the part of workers and their willingness to consider things such as short-time working, pay cuts, reductions in benefits, etc, as an alternative to outright redundancy.

Nigel Stanford is a partner at Cripps Harries Hall LLP

Further reading:

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