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
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.
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
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
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
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