Other matters to bear in mind
A number of other potentially crucial but perhaps less tangible issues should be considered if the situation is to be managed effectively:
- PR and communications:
- where, in particular, liquidity pressures have arisen as a result of a sudden event rather than a gradual decline in performance, it will be important to have an effective communications strategy in place so as to give a clear and reassuring message to all key parties, including:
- lenders
- employees
- counterparties
- credit insurers
- regulators
- consider the content and timing of any engagement:
- while designed to engender confidence in the company’s future, statements must not be misleading or misrepresentative
- appropriate level of detail and time of engagement will vary according to the addressee – it may be helpful (and ultimately crucial) to engage openly with lenders at an early stage, while you will need to control carefully information released to employees, counterparties and the public to avoid an uncontrolled collapse in confidence
- be careful not to make statements unnecessarily which might form the basis on which counterparties could be entitled to terminate contracts eg an admission that the company is struggling to pay debts as they fall due
- should you engage external PR advisers?
- do you have any legal/regulatory obligations that might require you to disclose issues to a particular party or market? Loan agreements, for example, commonly contain quite extensive information undertakings from a borrower
- where, in particular, liquidity pressures have arisen as a result of a sudden event rather than a gradual decline in performance, it will be important to have an effective communications strategy in place so as to give a clear and reassuring message to all key parties, including:
- commercial relationship assessment – analyse and focus on key commercial relationships with a view to minimising business disruption:
- review key commercial contracts for termination rights which might be exercisable by a counterparty as a result of the liquidity issues you face
- if appropriate, engage with counterparties to assure them that it is business as usual.
- ensure that you continue to make payments (and honour other contractual obligations) within the terms of key contracts unless otherwise agreed
- identify viable alternative suppliers/purchasers in the event that key existing contracts are terminated
- directors’ duties – if you experience pressure on liquidity, consider seeking external legal advice as soon as possible:
- the class of persons to whom the directors owe their duties, and the nature of those duties, may shift (invariably towards protecting creditors’ interests)
- in certain jurisdictions, where a company’s solvency is in question or it is over-indebted, the directors may be under a duty to file for insolvency within a certain period of time
- equally, in certain jurisdictions, directors may be subject to a duty to minimise losses to creditors. This might mean filing for insolvency immediately or by continuing to trade, depending on the circumstances. Further, it may be at odds with this duty for the company to incur new credit or further debt with which to bolster liquidity where the prospects of repayment are doubtful (this must be considered in the context of the company’s efforts to obtain new funding or even draw down further funds under existing facilities)
- directors may be personally subject to criminal and/or civil liability in the event that they fail to comply with their duties
- resignation may not be an option for a directors as this may not exonerate them from responsibility for the situation
- navigating a company through uncertain times and reconciling sometimes conflicting duties can be a minefield for directors. For this reason, it is vital that the position is kept under constant review. Hold board meetings regularly and minute all decisions properly to evidence the directors’ intent to consider and comply with their responsibilities
- appointment of advisors:
- consider engaging legal and financial advisers promptly upon any warning of impending liquidity issues – more time to consider an issue often leads to a better outcome. Don’t put your head in the sand
- while it may seem counter intuitive to incur additional fees when liquidity is tight, advisory assistance may be crucial to steer the company back into calmer waters (and demonstrate to relevant third parties that you take the situation seriously)
