Deal or no deal, finance directors need to tread carefully

When Johnny Nash sang “I can see clearly now the rain is gone, I can see all obstacles in my way” he wasn’t talking about being a FD and he definitely wasn’t talking about being an FD during this deal or no deal political and economic climate.

To the  contrary, disarray, confusion, desperation, isolation, denial (no, not the government) are sometimes the emotions of FDs of companies facing financial difficulty or challenging times. Many industries are already facing severe conditions. To make things worse: Brexit uncertainty, increasing costs, increasing cost of a potentially reducing labour force, possible delays in the arrival of vital goods with a “no deal” Brexit…. the list goes on.

Dealing with the known is hard enough. Dealing with the big unknown of the impact of Brexit is almost impossible – and FDs need to steer through this and provide positive leadership to their staff and stakeholders.

The concern has recently been exacerbated by banks’ clear concerns about being able to lend in this environment. It has been reported that calls have been made for government to assist in providing an environment to ensure funding is  available for those companies affected by a “no deal” Brexit through issues such as cash flow disruption, delivery delays due to a customs back log and also a wide scale inability to properly prepare in such uncertain times.

Others in the banking industry have suggested the establishment of a distributable fund specifically to assist those affected by “no deal” cash flow and shipment issues. Nothing has yet been put in place and it remains like much of the Brexit debate, just words.

The forecasts also don’t paint a rosy picture. Forecasts have predicted a rise in insolvencies of 20% in the event of a “no deal” Brexit and even a near 10% rise even if there is a late deal. That is potentially a lot of lost revenue and a lot of lost jobs. FDs are at the heart of this maelstrom.

Of course, no one really knows what will happen and the impact will vary in different sectors. Certain parts of the construction industry, and the food and beverage and retail sectors are having a torrid time. Oddbins, HMV, LK Bennett, Patisserie Valérie, Carillion, Interserve and yet more company voluntary arrangements are just the latest in a recent trend. Retail and certain manufacturers will be further affected if the much talked about customs delays materialise in a “no deal” Brexit.

Board decisions

Boards – with huge reliance on the FD – will be dealing with all sorts of tangible and less tangible questions: Are we insolvent or arguably insolvent? Can trade continue? Should trade continue? How does that happen – who should I pay and who should I not pay?

Directors need to be careful that they act appropriately and avoid trading whilst insolvent (“wrongful trading”) or paying some creditors and not others. This can expose directors to personal liability and also potentially disqualification as a director. FDs are also often judged against a higher expectation than other directors due to their professional qualifications and experience.

No one wants to point the finger in genuine business failures (and the Courts are making it increasingly hard for liquidators to prosecute wrongful trading claims), but there are practical steps that FDs can take to ensure they are complying with their duties as directors but also protect their own position if the company eventually does fail.

• Do Data. Ensure that your management information is accurate and up to date. It sounds simple but it is a constant cause of downfall and its absence could reduce the options for some business rescue mechanisms.

• Do remember that if the company is insolvent, the duty of directors to shareholders is intruded by the duty to creditors. Shareholders are no longer the primary consideration – this is incredibly important, particularly in owner manager businesses (but has also been a prevalent issue prior to the Interserve administration).

• Do be realistic about projections and provisions. Otherwise you are fooling yourself and therefore fooling the shareholders and creditors.

• Do use gut feeling. A reasonably held gut feeling based on accurate and up to date financial and trading data goes a long way. You know the business and deep down you know the chances of survival and growth (or not).

• Don’t bury your head in the sand. Denial is trouble. If things go wrong and a court looks back with the benefit of hindsight, pretending nothing is wrong, blind delusion or just the inability to deal with what is a very challenging situation will do FDs no favours with a judge (which can ultimately lead to personal liability).

• Do have an open dialogue with lenders. Funding may be a part of a wider solution although if the company is insolvent the company should not, without advice, take further credit without a firm plan and a belief in the outcome, and should not grant new security over the company’s assets (even in the context of supply agreements / retention of title). Importantly, lenders hate to be the last to know what is going on and such a dent in the relationship could limit options to minimise loss to creditors or save the business. Again, that could come back to bite directors.

• Don’t let other issues affect judgment about what is best for the business and its creditors. A decision based on trying to avoid liability under a personal guarantee and not on what is the right decision for creditors is widely seen in practice and will result in “open season” on directors and FDs.

• Don’t declare a dividend, pay parties connected to directors or shareholders or otherwise transfer money or assets from the business even if there is arguably some payment for that asset, without taking advice. Just don’t.

• Do phone a friend. Taking specialist accounting, insolvency and legal advice can not only help find a solution for the business but can also protect a director from liability. In a recent case directors claimed that a company was not insolvent (and so they argued could not be held personally liable) but they admitted they couldn’t even afford to pay for advice on redundancies. The writing was on the wall and they turned the other way.

• Do document decisions. After analysis and making a reasoned decision on each business challenge, make sure the process, the underlying information and decisions are documented. Showing that the options were considered on the basis of available material and the decision was reasonable in the circumstances can provide a strong defence to any criticism, even if the decision turned out to be the wrong one.

Directors don’t have the benefit of hindsight and it is easy to criticise after the event but using the above as a basis, you can help protect creditors of the business and protect yourself and fellow directors. And if the government does start to integrate  its thinking and put in place a broad package of measures to address some of the key issues (such as a fund for distribution or HMRC encouraging (and being resourced for) time to pay agreements or other leniency in deadlines), this will aid FDs in navigating the way through and out the other side.

Following this advice will not turn it into Johnny Nash’s “bright, bright, sun-shiny day” but it will put you in good stead to comply with your duty and, as a result, protect yourself.

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