Weathering the storm: top tips for facing the current economic climate

Emma Shipp, Director of client services in the Russell-Cooke Solicitors, corporate and commercial team.
Emma Shipp
7 min Read

At the moment businesses are facing a perfect storm. Not only is there a worldwide pandemic causing people to stay at home, affecting buying habits and supply chains around the world, but the UK has just extracted itself from the EU single market and single customs union. Overall the UK economy as measured by GDP is estimated to have fallen by 9.9% since 2019 which, if the estimates are confirmed, is the biggest fall since modern records began. Against this backdrop it is not surprising that businesses are struggling. In order to survive and thrive a business needs to know how to make the best of the current economic situation.

Below are answers to some of the questions our SME clients are asking.

What if some of my contracts are now either impossible or unprofitable to perform?

In the case of a contract which has become impossible to perform, whether because your supply chain has broken or you are prevented by Government regulation or for some other reason, then you should review the terms of the contract carefully. Many contracts will have what is known as a 'force majeure' clause incorporated into the terms. This provides that if something occurs beyond the control of the party impacted (sometimes called an 'act of God') then that party is released from the obligation that has become impossible to fulfil. Whether or not the force majeure clause applies will always depend on the particular circumstances and whether the clause wording covers those circumstances will be a matter of interpretation.

If the force majeure clause doesn't cover your circumstances or there is no such clause in your contract then you can consider whether the contract as a whole has been frustrated. This means that since the contract was entered into circumstances have changed to such an extent that it is no longer possible to fulfil the contract or it has become illegal to do so. In that situation the contract itself falls away and neither party is obliged to fulfil it. Again, there is plenty of case law on what amounts to frustration and generally this can only be used in the most extreme circumstances. Using force majeure or the common law doctrine of frustration can be fraught with difficulties and, once you have reviewed your contract carefully to understand your legal rights, the best course of action in the first instance is to talk to the other contracting party or parties to try to come to a sensible arrangement that works for you all.

In the situation where a contract has simply become unprofitable but not impossible to fulfil, your legal options are likely to be more limited. Goods that are supplied into the EU are a prime example, as it may be the case that delivering those goods to the EU is now more time consuming and costly but is unlikely to be impossible. Again, the starting point is to look at your contract. Is there a 'material adverse change' clause allowing a re-negotiation in the event of something that was not anticipated at the outset? If so, then depending on the wording you may be able to force changes to the contract or be released from it entirely. There may be specific provisions triggering variations and you need to look at those carefully. Again, once you know what your formal legal options are the best course is to talk to the other contracting parties.

If you do agree a variation to the contract then be careful to document this in accordance with the terms of the contract as you do not want to later find that this is a matter of dispute. An exchange of emails may not be sufficient particularly if the contract requires a variation to be in writing and signed by representatives of both parties.

How can I protect both my staff and my business?

You are likely to have various different categories of staff at the moment – some of your staff may be furloughed, others may be working from home and a few may be attending the office on a regular basis. As an employer, you need to consider each category both in terms of how you protect your staff but also how you protect your business.

The furlough scheme has been extended to the end of April and possibly will be extended further. It now allows you to furlough staff for part only of their working hours and receive a government grant of 80% of their wages for the time that they are furloughed. You need to keep good records for this period and be careful not to ask furloughed staff to undertake any work during the time they are furloughed. This could include attending team meetings and checking work emails so ideally you should exclude them from your business network to ensure no work is being undertaken by them. Furloughed directors can continue to fulfil their statutory duties but must not do anything that is revenue producing.

If employees are working from home then all relevant employment law regulations will still apply such as working time, health and safety and provision of suitable equipment. Ideally you should have a homeworking policy in place making it clear what is your responsibility and what is the responsibility of the employee. Data protection can be an issue for those with staff unexpectedly working from home and you need to consider how you protect the integrity of your data. As a very simple point, staff should be provided with work laptops and should not be downloading your data onto their own devices, the work laptop should have a secure password and should not be used by other members of the household.

For staff attending the office, clear safety measures need to be in place. You should carry out risk assessments regularly and maintain records for future reference not only to protect staff but also in order to defend yourself if a dispute arises.

Mental health and well-being are key topics when it comes to staff. In particular, thought should be given to keeping in touch with people whether they are working from home, furloughed or in the office. For those on furlough it may be more complicated and many businesses are setting up WhatsApp groups or similar means of communicating with furloughed staff which does not involve sending an email through the firms’ network.

How do I best make use of Government assistance?

Applying for all available Government assistance can be key to the survival of a business. In parallel with the furlough scheme, businesses can apply for the Business Interruption Loan Scheme which provides loans up to £5m for small businesses or a Coronavirus Bounce Back Loan for loans up to £50,000 where funds are needed more quickly. Securing these loans is subject to certain conditions and approvals. The Government also offers assistance with statutory sick pay, with allowing time to pay tax, with support grants from your Local Authority and possibly a business rates holiday depending on the nature of your business. It is important to consider the nature of the support you are seeking and particularly whether it is a loan or a grant. A loan, such as the CBILS loan mentioned above, will need to be repaid and will revert to normal commercial terms once the first year interest and fees have been paid by the Government. Local Council and Government websites are a great resource for finding out what you may be entitled to and how you apply.

Should the worst happen…

Insolvency can be a scary prospect but often the earlier you seek advice from an expert, the clearer the process will be.

There have been some changes to the insolvency rules as a result of the pandemic with the ability to issue statutory demands and winding up petitions currently suspended until the end of March. There has also been a relaxation of wrongful trading rules so that directors are less likely to face personal liability if they continue to trade through a bad patch. If you do think you need to consider a formal insolvency procedure then you can file at court for a moratorium to consider your options. The directors will remain in control of the business but (with some exceptions) no legal action or insolvency proceedings can be taken without the leave of the court.

What insolvency route you ultimately choose, whether CVA, administration or liquidation will depend on a number of factors including the underlying viability of your business and possibly the support of your creditors. If you have a secured creditor, such as a bank, then you have to start talking to them at an early stage as their security is likely to provide them with some control over the insolvency procedure you decide to use.

Looking forward

On a more positive note, it is worth remembering that with great change comes great opportunity. Even if your business is not in an area naturally benefitting from the call to stay at home, the current economic climate may present you with the opportunity to re-set with customers, suppliers and staff and emerge stronger than ever. It is more crucial than ever to seek counsel early on to make sure that you navigate these stormy waters with the help of an expert.

Briefings Business Russell-Cooke Emma Shipp Brexit Covid-19 pandemic economy businesses weathering the storm employment commercial contracts insolvency