Coronavirus – Management’s duties and liability
The global coronavirus pandemic presents a large variety of challenges to business management, one of the immediate effects being liquidity constraints as a result of lost revenue. This difficult and grave situation urges management to exercise vigilance and take timely action on a more extensive scale than usual. Plesner’s Coronavirus Task Force outlines below a number of issues management should take into account in its crisis management strategy.
Management bears overall responsibility for the company’s operations and financial situation, including for how to address any financial difficulties that may occur. Under the Danish Companies Act, members of management are subject to a number of duties, including the duty to ensure that the company’s cash resources are sufficient at all times, so that the company is able to meet its current and future liabilities as they fall due.
Management is required at all times to assess the company’s current financial situation – not least in times of crisis when conditions can change/deteriorate very quickly. Measures that are commensurate with the specific impacts of the crisis must be taken and adequate financial management must be performed so as to ensure that the company, business partners, creditors, etc. do not suffer any loss that could be averted or reduced by timely action. This will also minimise management’s risk of being held personally liable later on.
Especially in times of crisis
In times of crisis, we need proactive management capable of responding to rapidly changing circumstances. Many companies are currently experiencing that this is anything but “business as usual”. Management needs to align the company with these changes. This applies in particular to:
- Decline in revenue – due to a fall in demand and/or delivery challenges: How does management ensure adequate adjustments?
- Liquidity management – how to ensure sufficient liquidity, ongoing updating of cash flow budget/cash resources in relation to necessary measures
- Rescue packages – the Danish government has launched and is expected to continue to launch a wide range of measures to support the business community. Management should continually monitor and consider how these measures can affect and potentially benefit the company
- Debtor management – how to ensure payment of receivables on an ongoing basis: Are all customers, including principal customers in particular, fully able to pay their suppliers, what are the situation and exposure of customers, have counterclaims been presented or is there any likelihood of counterclaims or any other circumstances which, currently or potentially, may affect the value and cash flow?
– Intercompany balances (current and future alike) with consolidated enterprises and associates: Are they able to pay, are loans still provided on a prudent and commercial basis considering the circumstances and current developments, and what will be the impact of any reasonable adjustments?
- Creditors – both external and internal: Is the company able to pay its liabilities as they fall due and, if not, what measures are necessary to ensure this?
- Trade and delivery: Is it acceptable to continue operating under normal terms of delivery/sale, or are adjustments called for, e.g. “Corona clauses”?
- Employees – their safety and security: How and to what extent can work/production be maintained?
– Time off in lieu, mandatory holidays, reimbursement arrangements: How to address this in the best possible and most suitable way
Given the speed of change, including the risk of aggravating the company’s financial situation, it is crucial for management to ensure close and regular contact between employees and the workplace.
When payment challenges are predicted/occur
If a company is in a situation where its liquidity is, or is predicted to be, so strained that the company is unable to pay its bills as they fall due, various measures are available and need to be considered in relation to whether and how the company’s ability to pay is adequately restored. This could be in the form of adjustment of costs, loans and the conclusion of agreements and arrangements with creditors/business partners.
The conclusion of agreements for extension of payment can be an important tool in restoring the sufficient liquidity balance between current income and expenses. However, extension agreements should be concluded to provide an effective solution, not simply replacing one problem by another. Therefore, management should be attentive to and consider the following:
- Which liabilities are to be covered, and are the covered liabilities sufficient to ensure that the liquidity need, in management’s view, achieves the necessary balance – both in the short and longer term (also on the other side of the crisis)?
- Are creditors who have no secured claims treated equally, or are certain creditors favoured over others?
- How are debts/receivables – both current and future – between subsidiaries and the parent company handled compared to other debt?
- What steps should be taken if circumstances change with the effect that the agreement for extension of payment cannot be performed as agreed – is sufficient manoeuvrability available so that foreseeable changes in a time of crisis do not jeopardise the necessary extension – and is there any right to re-negotiate if circumstances change?
Decisions are currently made on a basis completely different from the usual basis of facts and evidence on which companies, and also the government of Denmark, must act. That is why decisions will be made which, “with the wisdom of hindsight”, were not the right ones. Wrong decisions will be made, as well. The question is how – and to what extent – members of management can be held personally liable for such wrong decisions, including what considerations management should make to avoid the risk of incurring personal liability.
Business judgments related to the development of the crisis
In a crisis situation, management’s liability is assessed according to what is known as the business judgment rule, which generally means that directors and officers do not incur liability in damages if a given decision has been made on an informed basis. This applies even if the decision subsequently appears to cause a loss. The crucial point is that the business judgment that subsequently appears to cause a loss was made on an informed and reasoned basis.
In order to mitigate subsequent criticism and reduce the risk of liability claims, it is important that decisions and ongoing considerations made by management in relation to its duties and obligations are made on a well-documented and informed basis – given the specific circumstances.
Management’s assessment of responsible crisis management must constantly be evaluated against the ever-changing circumstances, and it should be possible to provide documentation proving that this was the case and that the circumstances which were considered essential to the relevant decisions were also sufficiently present. It should therefore also be possible to prove the intensified contact in management, the ongoing deliberations and the resulting decisions.
Plesner’s Insolvency and Restructuring team stands prepared to assist our clients with the necessary advice in relation to these challenges. For many years, we have provided recognised, competent, results-oriented and innovative advice to businesses in crisis, their business partners and the banks and other financial institutions forming part of the solution in crisis situations.