Improving cash flow during COVID-19

The government has introduced a number of measures to assist businesses since the COVID-19 outbreak. Not all businesses are in a position to benefit from the furloughing of staff or the loans and guarantees made available by the Chancellor but all will need to consider how they can continue to manage and preserve their cash flow.

The Government issued guidance on 7 May 2020 intended to advise parties to contractual disputes, but such guidance, whilst advisory, will not necessarily be welcomed when you are the party owed money necessary to keep your cash flow in check and your business continuing to function.

In addition, directors will need to consider steps available to protect both their companies and themselves.

There are options for you to consider in these circumstances:

1. Review your contract

The first point in any contractual dispute is to review your obligations and your rights. For example the terms of the contract may set out whether you are entitled to interest if invoices are unpaid.

The guidance encourages parties to act fairly to resolve disputes recognising that where reasonable behaviour is employed by both parties the economy is protected and cash flow is maintained.

We have discussed the guidance in detail in a previous article.

2. Directors’ Duties

As a director you owe general duties to the company which include exercising your reasonable skill and care, as such you need to consider the impact your decisions will have on the company’s business relationships.

It is of critical importance to consider that making decisions which have an impact on the company’s creditors are necessary to minimise potential losses of the creditors as well as protecting the business; breaching such duties can lead to serious implications such as disqualification.

If a business finds itself facing insolvency the duties of the directors shift from protecting the shareholders to protecting the business’s creditors; if the business were to proceed into a full insolvency situation the conduct of the directors in the period of time leading to the insolvency would be investigated and sanctions may be applied if the conduct was inappropriate.

In particular directors need to ensure they are not knowingly allowing their business to incur a debt they will not be able to service, or make payments to third parties which could be deemed to be preferential payments or transactions at an undervalue.

3. Negotiate

Before entering into a formal agreement with your creditors (a Company Voluntary Arrangement) you may be able to negotiate with certain creditors to agree a payment plan. Your commercial landlord may agree to a deferral in rent payments, you may agree with suppliers to pay invoices over a longer period than set out in the contract. It is essential to ensure that any agreed variation is recorded in writing and is in accordance with existing contractual terms.

Consider a virtual arbitration or mediation, varying the contract as necessary, which may result in a swift and mutually agreeable resolution to the imminent cash flow problem.

A Company Voluntary Arrangement (CVA) will assist where a business requires help or assistance in the shorter term to delay or reduce debts because of short term cash flow – a CVA allows the business to continue to operate under a director however the director’s decisions will be supervised by an appointed insolvency practitioner to provide protection to the business’s creditors.

4. Court Action

There will of course always be situations where negotiation and patience are insufficient and you must take legal action against debtors.

In the current climate, the courts are continuing to operate although on a reduced scale, and there are significant delays in claims reaching courts.

Issuing a claim will not necessarily result in a swift recovery, but it may prompt action by a debtor who has previously not engaged with you and which will provide some relief to an urgent cash flow situation.

The County Court, through its online system, is still operating for claims where quantum is under £100,000 and against one defendant only; outside these parameters claims should be issued in the High Court.

Jonathan Sachs (jonathan.sachs@irwinmitchell.com) and Richard Payne (richard.payne@irwinmitchell.com) from our Commercial Dispute Resolution Team together with Tom Paton (tom.paton@irwinmitchell.com) from our Restructuring and Insolvency Team will be providing a more detailed look at the points discussed above in our webinar at 2pm on Thursday 18 June 2020. If you would like to attend the webinar, please apply here.