Trading Ability – checklist for directors & officers

The announcement of temporary relief for directors for insolvent trading personal liability – or the new ‘COVID-19 Safe Harbour‘ – will provide some useful immediate benefit for companies and their directors. This is an opportunity for directors and officers to check the trading ability of their company (ie checking whether the continuation of the business is even an option).

The amount of information available can be overwhelming. It is important that Directors and Officers get the fundamentals right. We have prepared 14 critical points for consideration about a company’s trading ability:

1. Insurance – assets, D&O/management liability, business interruption?
2.  Computerised systems, backups, remote access, security
3. Secure physical assets, books & records
4.  Employees and contractors – are they available/cooperative? Can they work remotely?
5. Plant & equipment – is it adequate and in working order?
6. Financed assets – are there arrears? Threat of repossession?
7. Customers – how is the pipeline for the next month? Is there enough demand?
8. Stock take / assess inventory on hand – PPSR matters?
9. Suppliers – prepared to continue supplying? Pay cash on delivery?
10.  Be careful if you’re entrusting creditors with company assets (including transportation/delivery of goods…)
11. Debtors and Work in Progress – what can be finished & collected in?
12. Utility supplies – electricity, gas, telephone, mobiles etc any issues? Available?
13. Landlord – could there be a termination of the lease for non-payment?
14. Additional funding and working capital requirements – prepare critical cashflow…

For the majority of businesses that are faced with financial distress due to the COVID-19 crisis, the recently announced COVID-19 Safe Harbour will not be enough. Whilst it will offer some protection against insolvent trading personal liability over the next 6 months, there are limitations when it is compared to the 2017 Safe Harbour (under section 588GA).

The impact of the COVID-19 crisis will continue for more than six months, due to ongoing business restrictions or the knock-on domino effect. In our view, it is unlikely that a company can simply go into ‘hibernation’ for six months and then returning to solvent trading. It is expected that much more significant steps will be needed to manage existing creditors and restructure the business for its long-term survival.