Out-Law Analysis | 19 May 2020 | 12:35 pm | 4 min. read
Management teams will need to consider a variety of measures when seeking to protect their businesses against the possible future impact of the crisis, and make sure they can provide evidence of the rationale and thought processes applied in arriving at decisions.
In order to establish the benchmark for measuring the impact of any Covid-19 disruptions and assessing any losses which the company suffered as a result, the management team needs to show the company's trading and financial track record and outlook pre Covid-19.
Relevant documentary evidence includes business plans, sales order books or similar, trading budgets, financial projections and cash flow forecasts. Where the company has significant fixed overhead costs relating to staff, leases or supply chain, the details and evidence of such should be collated and retained. Examples of such evidence could include HR and payroll records, lease agreements, or supply chain arrangements.
Clear and consistent communications with the company's banks or lenders, employees, customers, suppliers and other third parties should be management best practice not only when faced with recessions or pandemics.
Management should make sure they understand the full state of affairs in order to take appropriate and considered actions. This requires a full and proper impact assessment of Covid-19 disruptions on the business and all its stakeholders, and the undertaking of such an assessment should be documented.
The assessment could include reviewing changes in the company's sales volumes or pipeline, or its supply chain lead times, and incorporating these into trading projections and cash-flow forecasts to understand and measure the impact on the company's revenues, costs and cash position.
Firms should make sure they keep stakeholders in the loop. Clear and consistent communications with the company's banks or lenders, employees, customers, suppliers and other third parties should be management best practice not only when faced with recessions or pandemics. Therefore, management teams should document and retain evidence of their and their staff's interactions with counterparties to show the timing, extent and content of such discussions, whether received from or provided to counterparties.
It is also important to show that the management team has continued to manage the company in line with shareholder expectations and its accepted governance framework. This means adherence to the company's purpose or mission statement as well as compliance with existing governance processes and procedures by taking into account the company's mission statement when making decisions, and communicating or discussing it with the board and obtaining board approval. Further, the management team would also be well advised to maintain regular communications with shareholders, regulators and the investor community or the wider public.
Management teams will need to show that they have properly considered all viable options in order to minimise the impact of Covid-19 disruptions on their company and stakeholders, and thus have been through a rigorous robust decision-making process in terms of the measures to be implemented.
Such processes could include scenario planning by assessing the projected impact of different cash and working capital management measures on liquidity and short-term viability, or cost/benefit assessments, sensitivity analyses and stress-testing of potential measures and alternative business models.
Management should also show that they had access to relevant experience and expertise during the decision-making process, either internally or by instructing external advisers such as lawyers, restructuring specialists or auditors.
Further, third parties on the other side of any future claim will be interested in whether a company’s management had fulfilled their duty to mitigate losses where possible. Third parties would expect the management team to have exhausted all potential avenues to generate revenue or reduce costs in order to minimise the company's losses and also safeguard cash outflows.
Ways in which management can fulfil this duty include discussions with customers, suppliers and lenders to agree changes to existing business terms; implementing alternative business models, products or services; or accessing external support such as government grants and loans.
Management should also consider the recent Cabinet Office guidance on responsible contractual behaviour which recommends that, in order to avoid “intractable disputes”, parties to a contract should seek to resolve contractual issues responsibly through negotiation, mediation or fast-track dispute resolution. Although this is non-statutory guidance, the government strongly encourages parties to follow the guidance for the long-term benefit of the economy.
Management should also include steps to monitor the effectiveness of the actions or measures put in place and, where necessary, to re-assess or amend those accordingly. In terms of monitoring effectiveness, this could involve continuous assessment of the company's financial and cash positions, trading projections and cash-flow forecasts and re-performing some of the analyses described above, and keeping up to date with the developments in the Covid-19 situation and new support or measures available to the company.
It is also important to prepare and continuously re-assess an exit strategy to set out actions and timing for a “restart” when Covid-19 disruptions have subsided. This will involve, where necessary, adapting the current business model and strategy for an expected post Covid-19 business environment as well as a detailed timetable and plan for immediate steps to increase the operational capacity and re-build the revenues, profits and cash inflows of the company.
Companies and their management teams find themselves in unprecedented times and the immediate focus is on ensuring that their company and all its stakeholders adapt as well as they possibly can to the hugely different business environment in which we find ourselves.
However, inevitably and at some point in the future, a retrospective assessment will take place of what happened and how companies, both those that endured and those that did not, ended up in the position they have. Both the company and its management team will want to be ready, and should do what they can now to prepare themselves, for when that time comes.