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27 March 2020
The coronavirus (COVID-19) continues to create an evolving list of challenges. However, while the health and economic impact of the outbreak is being felt worldwide, companies and their directors can take proactive steps to combat its negative effects.
Certain forecasts about the impact of COVID-19 make for harsh reading. The Organisation for Economic Cooperation and Development has predicted that the global economy could slow to 2009 recession level, and share prices have tumbled, with the Dow Jones down 7.5%, the Nikkei down 9.1% and the FTSE 100 down 11% at the time of writing. In the United Kingdom, Exeter-based Flybe has entered administration, citing, among other factors, the drop in custom due to coronavirus, which has exacerbated the problems that it faced prior to being bought by a Virgin Atlantic-led consortium in 2019.
As with other insolvency risks facing markets right now – including Brexit, the decline in oil price and other market-specific growth concerns – the key to containing the effects of the current coronavirus outbreak lie in management and mitigation.
The markets are indicating that a recession is possible, albeit not inevitable. What is inevitable is that businesses will continue to face greater pressure due to the breakdown of international supply chains, disruptions to manufacturing, cash flow issues and labour shortages. As the prospect of these factors increases, so does the insolvency risk for companies. Where a company fails, or is at risk of failing, to meet its contractual obligations, the risks of an insolvency event become more acute.
As the business community continues to feel the brunt of the uncertainty brought about by COVID-19 at both a local and an international level, the following considerations may assist in the management and mitigation of potential insolvency risks:
If a company enters the 'zone of insolvency' its directors must be mindful of ensuring that they continue to comply with their common law fiduciary and (depending on the jurisdiction) statutory duties. Business decisions will require increased scrutiny in times of global crisis.
As a result of COVID-19, and in addition to the risks referred to above, directors should consider the following factors:
Where a company experiences the issues outlined above, those difficulties will likely have an impact on its banks and lenders. The operational issues caused by COVID-19 and the knock-on effect of that for the company's lending arrangements will lead the lender to review and assess the following questions:
For further information on this topic please contact Keith Robinson at Carey Olsen Bermuda by telephone (+1 441 542 4500) or email (email@example.com).The Carey Olsen Bermuda website can be accessed at www.careyolsen.com.
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