COVID-19 Business Support Hub

Options for Directors: COVID-19

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As is our continuing guidance during this difficult time the first step is not to make a snap decision. The government has already committed significant resource to assist businesses during this period, most of which will start to come on stream during w/c 23 March and into early April, it is highly likely that there will be more assistance to come.

While many options will remain the same for distressed companies as they would under ‘normal’ economic conditions, there are a couple of options which become more prevalent in the current circumstances:

  1. Restructured trading:
    • Finding a way to continue to trade. Directors are likely to be acting in the interests of creditors if they can find a form of trading which helps the company to survive. The government clearly hopes that most businesses which have become distressed as a result of Coronavirus can fall into this category. Finding a way to trade may include:
      • Reduction in costs.
      • Negotiations with landlords.
      • Access to government loans and grants.
      • Change in product/service mix.
    • Crucially, continued trading should be based on a previously solid business which will, or currently expects to, return to profitability post crisis.
  1. Mothballing:
    • If a business can effectively wind down costs to zero or almost zero, in the expectation of ramping activity back up when trading conditions improve, mothballing may be a solution for how to deal with this uncertain period. If there remains the threat of action from creditors, it may be possible to mothball inside the protection of administration.
  1. Company Voluntary Arrangement:
    • Allows a company to enter into a standstill agreement with creditors, to undertake some meaningful restructuring, and to continue to trade. Importantly the day to day operation of the business is left in the hands of the directors. This could become a crucial mechanism to protect and reset distressed businesses which cannot achieve Option 1.
  1. Administration:
    • The primary aim of administration is to rescue the company as a going concern. The immediate benefit of administration is protection of the administration moratorium. In administration the company can continue to trade (if economically viable), or the business and assets can be sold to return value to the estate, establish a new viable trading entity, and preserve some employment. Transactions can be completed quickly where circumstances dictate.

Good businesses need to survive and for those that face distress it is clearly hoped that sufficient measures can be put in place to enable them to continue to trade during some form of temporary or permanent restructuring. Commencing an insolvent liquidation remains an option for any business in distress but it is hopefully one which can be avoided where other options can provide more value and the prospect of continuing to trade.

If you require advice on any of the aspects raised in this article, please contact one of our Corporate Advisory partners.

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