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Ten key issues for boards facing a pandemic

Posted: 22/04/2020

This note sets out the top ten issues for boards of companies and businesses facing the challenge of the Covid-19 crisis. Companies may have other considerations but we hope that these will go some way towards addressing the key points to bear in mind in this crisis. As such, they represent a snapshot of the current state of the law and will need to be checked to reflect any changes that may come into effect.

Statutory duties

All directors should be made aware of their statutory duties under the Companies Act including, in particular, duties to promote the success of the company, to exercise independent judgment, and to exercise reasonable care, skill and diligence. Under the first of these, directors must have regard to the interests of employees, creditors, customers and others, the impact of the company’s operations on the community and the environment, and the maintenance of a reputation for high standards of conduct.

Communication is critical

It is critical in a crisis to increase the frequency of oversight, make informed decisions and execute quickly. It is vital that the board consults with key resources such as internal counsel, CFO and, where necessary, external counsel and other advisors to assess and decide strategy and to execute the business continuity plan.

During a pandemic, you will need regular weekly virtual board meetings and separate calls. It is very important to minute what is discussed and the reasons for taking or not taking steps. These minutes could become relevant in the event of insolvency or if decisions are questioned in hindsight.

Operational flexibility

Businesses should review - and keep under review - their operational rules to enable effective remote working, speed up process, and decentralise power through digital approval. Boards should be modelling disparate scenarios based on how long and many lockdowns there might be. The board should set the tone and chart the course but may need to delegate authority to group companies/offices/teams for specific areas.

Review finances

It is going to be vital for the business to continuously monitor financial viability. It will need to look at cashflow for the short and medium term. It is important to keep under review any financial covenants to lenders and others. Boards should be reviewing funding requirements and, if appropriate, seeking additional funding. This may be from existing lenders, investors by way of a placement or bond issue, through government aid, or agreeing more favourable payment terms with suppliers and customers.

Information on the UK Coronavirus Business Interruption Loan Scheme (CBILS) for companies with turnover of below £45 million and on the Coronavirus Large Business Interruption Loan Scheme (CLBILS) for companies with turnover above £45 million can be found here.

Stay solvent

The possibility of wrongful trading is suspended in the UK for three months from 1 March 2020 but other issues such as misfeasance and fraudulent trading remain. Boards should review both the cash flow test to determine if the business is unable to pay its debts as they fall due and the balance sheet test which will reveal if the value of the business's assets is less than the amount of its liabilities. 

If you are struggling to get paid by debtors, seek professional assistance. Contract defaults may be triggered if you are viewed as entering into an arrangement with creditors. It is important to take professional advice on insolvency. See our insolvency update here.

Manage your people

It will be important to review what changes to the workforce are needed. Is remote working, flexible working or unpaid leave possible?  How can government assistance in the form of the UK furlough scheme allowing for reimbursement of up to 80% of wages or £2,500 gross per month, whichever is the lower, be accessed (see our guide here)? If redundancy is the only option, how should it be implemented?

Contractual obligations

Businesses should urgently review key contracts with suppliers and customers. If supply is interrupted, does it constitute a ‘force majeure’ event? Are other remedies such as ‘frustration’ applicable? Other terms such as material adverse change, dispute resolution mechanism, notice of default and termination provisions should also be reviewed with variations negotiated where possible. Businesses should also test the integrity of the supply chain and explore plugging in supply from less affected alternative geographies. See here for more details.

Regulatory requirements

Regulated businesses will need to keep their regulatory, disclosure and reporting requirements for revenue, valuation or outlook under review. They should also keep under review any suspension or changes to reporting requirements and manage communications with stakeholders and regulators accordingly.

Insurance cover

It is vitally important to review insurance cover, including Directors & Officers (D&O) (also specifically from the perspective of potential insolvency), and cover for trading losses and business interruption during the lockdown and until a return to normalcy. Also keep notification requirements under review as cover may be avoided if you do not notify in time. See here for further information.

Resuming operations

Boards and businesses will need to think carefully about how they manage a return to premises. How will they reassure staff, customers, suppliers and investors that it is safe to resume operations? Will they need Covid-19 testing, masks, PPE and spacing in the workplace? Should they adopt shift or rotational working to ensure business continuity? 

Until a viable vaccine is developed and becomes widely available, they will need to plan for the possibility of relapses and further lockdowns. They may need to consider a more flexible workforce and flexible contracts and to look at re-modelling the business to meet demand and allow it to function profitably amid ongoing uncertainty. See here for further information.

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Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP