What Should Businesses do in a Time of Economic Uncertainty

What steps should a business take at a time of economic stress? 

All businesses are facing economic challenges at the moment, with the rise in costs across the board. Liquidity is a key factor for the survival of any business and given rising interest rates, the ability to source credit is squeezed even further. Businesses should look to reduce their debt burden, where possible and ensure they are calling in any debts owed to them. If your business is facing financial difficulties, those in your supply chain will likely be struggling too and you do not wish to have your financial stresses exacerbated by a domino effect of insolvencies.

I would advise that businesses need to engage proactively with their creditors, suppliers and shareholders to ensure they have the support they need to survive. Perhaps most importantly, businesses should take professional advice from their solicitors and accountants, and crucially take advice early to give enough time for agreements to be reached, in advance of any forced commencement of an insolvency procedure, by which point it can be too late to salvage the business. Taking early advice can also help mitigate any potential claims against directors if the company enters into a formal insolvency procedure.

What have been some of the recent trends in liquidations that you’ve noticed, considering the current environment? What trends do you anticipate to see in 2023?

The number of liquidations has started to rise, in comparison with the last few years when companies had the benefit of government support during the pandemic, through the furlough scheme and the availability of bounce-back loans (BBLs) and the coronavirus business interruption loan scheme (CBILS).

The most recent set of insolvency statistics show that creditor voluntary liquidations are rising, currently at 37% more than in January 2020. Compulsory liquidations are also up, but are a much lower percentage of overall corporate insolvencies. Some commentators believe the current rise in insolvency relates to those companies which would have become insolvent in any event, but were given a temporary lifeline during Covid and are now choosing to shut up shop. I think we are yet to see the full impact of the cost-of-living crisis and inflated energy costs on insolvency numbers, especially as the threat of recession remains.

I anticipate the retail, hospitality and construction sectors will be those most likely to struggle in 2023.

The number of liquidations has started to rise, in comparison with the last few years when companies had the benefit of government support during the pandemic, through the furlough scheme and the availability of bounce-back loans (BBLs) and the coronavirus business interruption loan scheme (CBILS).

What are directors’ duties in times of economic difficulty? 

Directors usually have to act in such a way as to promote the success of the company for the benefit of its shareholders. However, once the company begins to experience economic difficulty, their duties should shift towards putting the interests of the creditor body as a whole ahead of the members. The directors can be investigated by any subsequent liquidator or administrator for actions taken at this time, which can lead to personal liability for the directors and so any steps taken in the management of a company under economic stress should be carefully considered.

The recent Supreme Court case of BTI 2014 LLC v Sequana SA gave greater clarity to directors as to when their duties shift from shareholders to creditors. This was held to be when the directors knew or ought to have known that the company was insolvent or close to it and that an administration or liquidation was probable. It was stated that the closer the company came to insolvency, the more the directors had to be mindful of the creditors’ interests.

What are some of the actions which can be brought against directors once a company has gone into insolvency?

When a liquidator is appointed, the powers of the directors cease and the liquidator takes over the running of the company. In an administration, the directors may not exercise any management power without the administrator’s consent. The insolvency office holder must investigate how the directors conducted themselves during the relevant time prior to the insolvency and will file a report with the Insolvency Service. Directors can be disqualified for between 2 to 15 years where their behaviour falls short.

We are seeing more disqualification orders now, largely due to the fraudulent use of BBLs.

A claim can be made by an administrator or liquidator of wrongful trading, which is when a director knew or ought to have known that insolvency could not be avoided and did not take every step to minimise the losses to creditors.

Directors (including de facto and shadow directors) can be fined and held personally liable for any deficiency in assets from when they ought to have known the insolvency couldn’t be avoided to the point when the company entered into liquidation or administration. There is also the possibility of bringing a claim of fraudulent trading against the directors, which is a criminal offence with possible penalties of imprisonment and fines.

In a liquidation, directors can be liable for misfeasance where a director has misused company assets and/or breached their duties. This too can carry personal liability. Similarly, as part of their investigations the officeholder will review any transaction within specific time periods to see if they can be classified as a preference, a transaction at undervalue or a transaction defrauding creditors, which can all be unwound and the company restored to the position it would have been in had the transaction not taken place.

The directors also need to be aware of the status of their directors’ loans.

In the event of insolvency, any money owing under these loans will become immediately repayable.

Nicola Rout
Associate Solicitor

DD: +44 (0)1206 217031
Mob: +44 (0)7808 331806
Email: nicola.rout@tsplegal.com

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