Mission (almost) Impossible: Directing business in an uncertain era

Moments away from huge casualties. Sweaty palms. Someone needs to save the day. Which cable do you cut?

Brexit uncertainty, increasing costs, increasing cost of a potentially reducing labour force, possible delays in the arrival of vital goods with a “no deal” Brexit…. the list goes on. Being a director of a company is never easy but against this backdrop, the day job gets harder.

The concern has recently been exacerbated by banks’ clear concerns about being able to lend in this environment. It has recently been reported that two senior bankers have sought engagement from government on funding those companies affected by a “no deal” Brexit through issues such as cash flow disruption and delivery delays due to a customs process back log. Others in the industry have suggested the establishment of a distributable fund specifically to assist those affected by “no deal” cash flow and shipment issues. Nothing has yet been put in place and it is worrying that it has got to this late stage and the discussion is only just starting.

Many companies who are already financially squeezed are going to find the trading environment increasingly challenging. Trade credit insurer Euler Hermes recently estimated that a “no deal” Brexit could lead to a 20% rise in company insolvencies. Of only slightly less concern is that in its forecast even in the event of a late Brexit agreement, we could see an increase in insolvencies of 9%. That also comes on the back of the December 2018 figures produced by the Insolvency Service which evidence the highest number of company insolvencies since 2014. If that gets even close to materialising (in either scenario) it is going to have a significant impact on many communities through losses of livelihood.

Of course, no one really knows what will happen and the impact will be differently felt in different sectors. Certain parts of the construction industry, and the food and beverage and retail sectors are having a torrid time. Oddbins, HMV, Patisserie Valérie and rumour of more company voluntary arrangements are just the latest in a recent trend. Retailers and certain manufacturers will be further affected if the much talked about customs delays materialise in a “no deal” Brexit.

But how does this have an impact on a director’s job and duties, and how can you as accountants on the front-line assist? Directors will be dealing with all sorts or tangible and less tangible questions such as: are we insolvent or arguably insolvent? Can trade continue? Should trade continue? How does that happen- who should I pay and who should I not pay?

Directors need to be careful that they act appropriately and avoid trading whilst insolvent (wrongful trading) or paying some creditors and not others. This can expose directors to financial liability and also potentially disqualification as a director.

As trusted advisers and experts, accountants are often the first point of call when things get increasingly tough. Whilst no one wants to point the finger in genuine business failures (and the Courts are making it increasingly hard for liquidators to prosecute wrongful trading claims), there are practical steps that you and your clients can take to ensure they are complying with their duties as directors but also protect their own position if the company eventually does fail.

• Don’t panic. Rash decisions will lead to hot water. Stop, think of all the angles and understand every aspect of the business. Only then think about progress.
• Trust your instincts. Gut feeling based on the basis of good and up to date financial and trading data goes a long way. You and your client know the business and deep down know the chances of survival and growth (or not).
• Don’t bury your head in the sand. Denial is trouble. If things go wrong and a court looks back with the benefit of hindsight, pretending nothing is wrong, blind delusion or just the inability to deal with what is a very challenging situation will do directors no favours with a judge.
• Do remember that if the company is insolvent, the duty of directors to shareholders is intruded by the duty to creditors. Shareholders are no longer the primary consideration- this is incredibly important, particularly in owner manager businesses. There needs to be, in some senses, a detachment from the ordinary thinking process.
• Do have an open dialogue with lenders. Funding may be a part of a wider solution although if the company is insolvent the company should not take further credit without a firm plan and a belief in the outcome, and it should not grant new security over the company’s assets without taking advice (even in the context of supply agreements / retention of title) as there is the chance the security will be void and challenged. Importantly, lenders hate to be the last to know what is going on and such a dent in the relationship could limit options to minimise loss to creditors or save the business.
• Don’t let other issues affect judgement about what is best for the business and its creditors. A decision based on trying to avoid liability under a personal guarantee and not on what is the right decision for creditors is widely seen in practice and will result in open season on directors.
• Don’t declare a dividend, pay parties connected to directors or shareholders or otherwise transfer money or assets from the business even if there is arguably some payment for that asset, without taking advice. Just don’t.
• Do consider your tool kit. Protective glasses (you the accountant), wire cutters (insolvency practitioner), bomb proof vest (solicitor). Taking specialist advice can not only help find a solution for the business but also protect a director from liability.
• Do document decisions. After analysis and making a reasoned decision on each aspect of the business challenges, make sure the process, the underlying information and decisions are documented. Showing that the options were considered on the basis of available material and the decision was reasonable in the circumstances can provide a strong defence to any criticism, even if the decision turned out to be the wrong one.

It is obviously not as simple as cutting the red cable. You need to try to understand what the cables do, what the implications of cutting them are, what are the wider consequences or collateral damage and then come to a reasonable and reasoned judgement. Directors don’t have the benefit of hindsight and it is easy to criticise after the event but using these as a basis, you can help protect creditors of the business and protect directors. And if the government do start to integrate their thinking and put in place a broad package of measures to address some of the key issues (whether that be a fund for distribution or steps such as HMRC encouraging time to pay agreements or other leniency in deadlines), this will aid directors in navigating their way through and out the other side.

You may not be diffusing the bomb like Ethan Hunt or Lara Croft but you are on the other end of that ear piece guiding them through it. And they will thank you for it, and it will help solidify a long and strong professional relationship.

This guest post was written by Edward Starling, partner at Wedlake Bell.