Date: 24/03/2020 | Healthcare, Commercial Property, Corporate & Commercial, Employment & HR, Dispute Resolution, Energy & Natural Resources, Environment & Regulation, Planning, Residential Development, Infrastructure & Projects, Health & Safety, Construction, Business & Professional Services, Blogs
The Covid-19 crisis has truly taken us into the world of “known unknowns”. Mervyn King, now Baron King of Lothbury, was Governor of the Bank of England at the time of the 2008 banking crisis. He has said the Covid-19 crisis will have much wider and deeper effects. He also said that we need to have businesses to come back to once the health aspects are under control.
This note covers some issues where you may need our input. This is not a time for writing detailed legal treatises, as you will certainly have neither the time nor inclination to read them. These are general pointers of matters which may be of importance to you and you can contact us if you need greater detail or specific advice.
Companies House obligations
A company still has its filing obligations at Companies House, eg Accounts and Confirmation Statements.
Companies House has announced a relaxation of the filing obligation for accounts where it becomes apparent that accounts will not be able to be filed on time due to the company being affected by Covid-19. An application can be made to extend the period allowed for filing. It is important that Companies House are contacted as soon as the situation becomes apparent to the company.
Although no announcement has been made of any other relaxation of filing obligations, if you are going to encounter any difficulties with meeting filing deadlines, then it is important to make contact with Companies House before the deadline is missed.
Board and shareholder meetings and resolutions
Board and shareholder meetings may be able to be held in a way which allows persons who are not physically present together at the same place to attend, speak and vote by electronic means.
You need to check if the company’s articles of association prohibit virtual meetings or set out procedures that must be followed. The general provisions of the Companies Act apply subject to any contrary provisions of the articles.
E-communications with shareholders (for formal communications such as notices of meetings) has its own set of rules. In general, a shareholder needs to consent to the use of e-communication and a company cannot simply chose to start using that method. Again, the company’s articles of association need to be reviewed for any provisions on e-communications which may differ from the statutory rules.
You may be in the position of having convened a shareholder meeting but are not sure if it will be able to take place. Your articles of association should contain provisions on adjournment of meetings but they are unlikely to deal with what happens if the proposed meeting is within a quarantined area.
Stock Exchange announcements
It has been announced by the FCA that regulated companies (the top listed companies) should not publish their annual results for at least the next fortnight.
All full list and AIM companies, and companies on other dealing platforms, must keep under review the need to make announcements about the effects of the Covid-19 crisis on their current trading and prospects.
Execution of documents
Counterpart execution (ie all the parties not signing on the same physical document) can be used under both Scots and English law. This allows each party to a contract to sign their own copy, and once all of the copies have been delivered the counterpart signatures will make up “one” document. The requirements vary for each jurisdiction but, for both, it is important to ensure that the document to be executed contains a clause permitting counterpart execution.
The law on electronic signing of documents is still very much developing. Although e-signing services, such as DocuSign, are being used more and more, the law is still unclear. The issue is one of the standard of evidence required in the event that an e-signature needs to be upheld. If you need to use e-signing for a document, then it is important that you take legal advice on the method being used.
Force majeure and Material adverse change
Many agreements contain a “force majeure” clause, generally referred to as “Acts of God” and quite often not fully read and understood. There was recent comment in the business press that Primark have used the force majeure in their supplier contracts to cancel all future orders, even those which have been manufactured and are in the process of being delivered to the Primark warehouses.
Force majeure is the right in a contract for one party to remove liability, or terminate completely, where unforeseeable circumstances prevent fulfilment of the contract or natural and unavoidable catastrophes interrupt the expected course of events.
“Material adverse change” is similar to force majeure but is much more common to share and business purchase agreements, debt funding agreements and equity funding agreements. A material adverse change (MAC) is an event which significantly reduces the value of a company or an asset. Purchase and funding agreements quite often have a gap between signing and completion (to allow conditions to be purified) and if a MAC occurs in that gap period, the purchaser or funder can withdraw from completing.
On an ongoing basis, debt and equity funding agreements will contain MAC clauses. These give the funder the right to withdraw or vary the funding in the event of a MAC occurring.
You could be party to a contract with a force majeure or MAC clause – which could be enforced by you or against you. Ultimately whether the enforcement is competent will only be decided by the courts but you should take legal advice before you start any enforcement or as soon as you receive notice of enforcement against you.
Events of default
All loan agreements (and many other types of agreement) will contain “events of default”.
The Covid-19 outbreak and resultant pandemic will not be a specific event of default which could cause the debt to become repayable before the normal repayment date. However, the generalities of the events of default may cover the situation.
Both lenders and borrowers should review the events of default in current loan agreements. The default provisions in any agreement which is in the process of being negotiated should be reviewed to ensure it takes account of the current conditions.
Where a lender decides to “call” an event of default, both lender and borrower need to be clear as to the effect. This is an issue which caused many disputes during the 2008 crisis and later.
What is the position if a lender calls an event of default but does not then proceed to enforce and attempt to recover the debt? What if a default occurs but the lender does not make a formal call; has the lender waived any right to call and enforce the default at a later date?
The current financial conditions mean that all lenders will be looking at the financial covenants in loan agreements – and it is important that all borrowers do the same. Failure to meet a financial covenant will give a lender the right to call a default and enforce early repayment of the debt.
All borrowers should be testing any financial covenants against current and expected trading and asset values. If it is likely that a covenant will not be met, then contact should be made with the lender as soon as possible. Waivers and variations can be agreed but it is much easier to have that discussion before the covenant has been breached.
As with any event of default, the lender must decide whether to call a breach of covenant and move to enforcement or only to call and reserve their position.
Variation of contract - waiver or deferral?
The parties to a contract may agree to vary the terms. The contract itself may say how a variation is to be recorded, eg in writing and signed by all parties; but even if it does not, it is important that any variation is properly recorded (even in an exchange of emails) to ensure that there is no misunderstanding at a later date.
An example of this is when payment obligations are varied. Does the variation of a payment obligation constitute a waiver (the amount is written off, never to be paid) or a deferral (the amount is not written off but is to be paid at a later date).
Duties of directors in face of insolvency
Regrettably one of the effects of the Covid-19 crisis is likely to be the number of businesses which will be facing insolvency. How the directors act when facing insolvency can have consequences after the event.
Clearly no director should do anything which would amount to “fraudulent trading” but all directors will be at risk of “wrongful trading”. Wrongful trading can result in personal liability of the director.
Wrongful trading is when a company has gone into insolvent liquidation and before that time a director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration.
This is a test which requires a director to have a crystal ball, but then have their actions reviewed with the benefit of hindsight.
What is important is that advice is taken as early as possible and that records are kept of the advice given and the actions taken.
The list of issues facing your business will be endless but growing. We appreciate the support our clients have given to us and want to assure you that in these difficult times you can call on our support for you and your business.
We will be publishing more posts on our website, some of which will go into more detail on these and other topics. Our colleagues in the other teams across the Firm will also be publishing posts relating to their areas of expertise.
The Corporate Team at Davidson Chalmers Stewart are all continuing to work, from varied locations, and we are available to help you on any issues that may face you in your business. You will be able to get hold of your normal contact by email or mobile. If that does not work, please call 0131 625 9191 and leave a message to be passed on.
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