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19th March 2020

COVID-19: next steps for businesses.

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As businesses struggle to cope with the impact of the Coronavirus outbreak and the shifting sands of governmental advice and warnings it is hard to know where to turn and what actions should be a priority. Below we outline key considerations for any business to take at this stage in the outbreak. Are you insured?
When disaster strikes many people will reach for their insurance policy. However, there is cold comfort from the terms of many insurance policies as most exclude interruption due to communicable diseases. This specific wording was included following the SARs outbreak of 2003. In any event, most policies would limit recovery to physical costs (such as for a deep clean) and specifically exclude loss of revenue. It is worth checking the wording of your policy to understand the level and extent of your cover.

Is immediate government help available?

Following the budget and then the further announcement of support measures on 17 March there are a number of areas where government help may be forthcoming depending on the size of your business and, in some cases, the industry that you are in. This support takes the form of refunding of statutory sick pay paid to your employees, business rates holiday for certain businesses and a time to pay scheme introduced by HMRC.

For more details please see Hewitsons note on Budget Business Support Measures here.

What about longer term government loans or grants?
 
The budget and subsequent announcement also provided a fund to help businesses survive this period of intense disruption. Grants (non-refundable) are available to all businesses eligible for Small Business Rate Relief or Rural Rate Relief and there is a higher grant available to those in the hospitality and leisure sectors. As well as providing grants, the Business Interruption Loan Scheme which is due to be launched through the British Business Bank is designed to provide government backed loans which are repayable in due course. The announcement on 17 March also provided an additional loan route to be administered by the Bank of England.

Can you ask employees to take unpaid leave?
 
In addition to reviewing all the possible lines of additional support, businesses will also be looking to reduce as many of their outgoings as possible during this period. As regards employees, it may be a case of considering lay-offs or asking them to take unpaid leave. Unless the contract of employment allows an employer to do this then the employee’s agreement would be needed. Alternatively, you could consider asking employees to take their annual holiday entitlement during this time although there are requirements to provide a certain amount of notice to do so.

For more information please see Hewitsons Guide to Employers here.

Can you reduce or eliminate contractual obligations?

 Other than employees, businesses will consider if there are other liabilities which they can reduce or, indeed, where they are no longer able to fulfil the contracts they have entered into. In these cases there are various options. You could look to see whether you have the ability to terminate the contract. If not, there may be provisions in the contract (usually known as ‘force majeure’) which set out the consequences of events occurring outside the parties’ control which could derail the contract. Whether and how you can take advantage of force majeure clauses will depend on the particular terms. You could also consider whether the contract is ‘frustrated’ i.e. it can no longer be performed and therefore the parties are released from the obligations on both sides. Before taking this action do consider the longer-term consequences to your trading relationships of invoking any of these provisions.

For more information please see Hewitsons note on Contractual Obligations here.

How can you deal with key creditors such as the bank or the landlord?

Subject to anything that your contracts say (such as your lease or facility agreement with your bank), it is unlikely that you have a right to reduce or cease payments to key creditors. It is best to approach them at an early stage and discuss how your business has and might continue to be impacted and proposals to reduce the burden on your business. There may be consequences of your actions which should be aired such as invalidation of the landlord’s buildings insurance if you vacate business premises for a period of time.

If all else fails…

Sadly it may be the case that you will need to consider a form of insolvency arrangement in order to protect both yourselves and your creditors from further losses. At this point you will need to take advice from an expert in insolvency procedures but generally the options open to businesses are to consider going into liquidation, administration or putting together a form of Voluntary Arrangement.

A liquidation will usually involve the liquidator closing the business and selling its assets to pay creditors proportionately whereas an administrator may opt to keep the business open usually with a view to selling it as a going concern. In both cases an Insolvency Practitioner will take charge of the business. A Company Voluntary Arrangement, on the other hand, is an agreement between the company and its creditors whereby the creditors agree to allow time to the company to pay the debts and may write off a proportion of those debts. The business remains open in that time and the current management continue to run it under the guidance of a Supervisor who will help draw up and administer the arrangement with creditors. There are a number of other options, both formal and informal, that need to be considered as well as notification to employees and creditors and advice should always be sought at an early stage.

Whatever stage you are at in your business planning for the pandemic, businesses would be well advised to consider all the options open to them and to take advantage of the help and advice on offer in these unprecedented times.