Global outlook
Impact on businesses
Managing insolvency risks
Considerations for companies and directors
Consequences for lenders


Global outlook

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.

Impact on businesses

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.

Managing insolvency risks

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:

  • Contracts should be reviewed to consider whether a default or insolvency event has (or could be) triggered and force majeure clauses are in operation, as well as the implications of such.
  • Balance sheets and cash flow positions should be reviewed with financial and legal advisers for early detection of solvency concerns providing the potential for early intervention.
  • Future new contracts should be tailored to include clauses that will allow for the required flexibility in times of restricted liquidity or economic uncertainty and account for epidemics, such as COVID-19.
  • Alerts should be set up so that businesses can keep apprised of market developments and the financial position of their partners, suppliers and rivals.
  • Businesses should communicate with their partners and customers to attempt to fulfil contracts. In reality, most parties to a supply chain and service providers will be adversely affected in some capacity, so an upstream or downstream party will likely be accommodating in an attempt to minimise their own disruption.
  • Businesses face a challenge in meeting their financial reporting duties while accurately assessing risk. Disclosing risks to the market can result in creditor or shareholder action and liquidity problems, so careful thought should be given to the terms of any disclosure.
  • Equally, regulated businesses will still need to meet regulatory obligations so far as it is reasonable to do so, even in the face of unexpected global challenges. Systems should be put in place so that a company can maintain, for example, compliance standards, even in the face of staff shortages or self-isolation.
  • In terms of any ongoing or pending litigation, there is a risk that opponents may be insolvent. In that regard, parties should consider whether an application for security for costs is advisable to protect their interests in the litigation.

?Considerations for companies and directors

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:

  • Can the company still meet existing contractual obligations? Is there provision to terminate existing contracts?
  • If the company holds securities, should these be reviewed or revalued? Should enforcement options be assessed?
  • Is there a business continuity plan in place?
  • Is the company in breach of its financial covenants with a lending institution? Can the company meet its existing debt arrangements?
  • What is the impact on the company's shareholders and accounts?
  • Should the company consider restructuring steps?
  • Does the company have any litigation exposure and should early advice be proactively sought, or should professional indemnity insurers be put on notice?
  • Is there a need to increase the frequency of management accounting and internal financial reporting? Is there a need for advice on solvency? It is possible that the emphasis on the duty to act in the best interests of the company can shift so that predominant regard should be given to creditors when there is a real risk of insolvency. This can be difficult to determine in practice, particularly in times of global distress.
  • On the same note, businesses should ensure that contingency plans and steps to mitigate the effects of COVID-19 (and any similar threat) are carefully documented so that there is a clear decision-making trail.
  • In terms of any disputes or ongoing litigation, the uncertainty and upheaval in the business community may provide fertile ground for settlement and resolving disputes without recourse to further litigation.

?Consequences for lenders

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:

  • Have any covenants been breached or is there likely to be an event of default under any facility documentation or security?
  • Does the company require further assistance with its short-term liquidity and what are the risks in providing that finance?
  • Has there been a material adverse change in circumstances? Should the security position be reviewed or revalued? Should enforcement options be considered?

For further information on this topic please contact Keith Robinson at Carey Olsen Bermuda by telephone (+1 441 542 4500) or email ([email protected]).The Carey Olsen Bermuda website can be accessed at www.careyolsen.com.