Hospitality and leisure is one of the sectors to be hardest hit as the Covid-19 outbreak worsens, with short to medium-term cash-flow issues expected. As the situation has developed so quickly and unpredictably it has been hard to prepare for. Directors should therefore be particularly alert to the effect that these circumstances may have on their statutory duties.

Here we consider the commercial impact of Covid-19 on the hotel and leisure sector, considerations for directors in terms of trading, and steps that businesses can take to prepare.

Government Support

The Government is taking steps to ease the effect of COVID-19 on the economy and will be working closely with the Bank of England. There is no specific support package for the hard hit hospitality sector as yet.  The Government has advised people to avoid pubs, bars, restaurants and clubs. Outlets are not being forced to close but are having their income taken away.  Without a package of support parts of the industry face being wiped out with a large number of resulting job losses. The sector is taking things into its own hands with operators forfeiting payment on rents, business rates and taxes in a bid to remain trading in the short term. Directors need to be prepared for the challenge that the industry faces.

The budget did, of course, introduce some measures to support impacted businesses generally.  These are temporary measures and include a statutory sick pay relief package for SMEs, a Business Rate Relief for small businesses and pubs and the HMRC Time to Pay Scheme. Further details can be found at COVID-19: support for businesses – GOV.UK

Additional guidance states that the Business Rates retail discount will be increased to 100% for one year and be expanded to the leisure and hospitality sectors. A new temporary Coronavirus Business Interruption Loan Scheme, delivered by the British Business Bank, is also being launched in a few weeks’ time to support businesses with bank lending and overdrafts. See Support for those affected by COVID-19 – GOV.UK

The Bank of England has also lowered its main interest rate from 0.75% to 0.25% following the recent stock markets and share plunge around the world.

Directors’ duties during times of uncertainty

Directors who are concerned about the company’s ability to meet its current and future financial commitments following COVID-19 should seek independent advice as soon as possible if they are to avoid potential personal liability under insolvency legislation. The potential risks for a director in such circumstances are complex.

Two tests are used to establish insolvency:

  • the cash-flow test looks at whether a company is unable to pay its debts as they fall due;
  • the balance-sheet test focuses on whether the company’s liabilities outweigh its assets.

Applying the tests is not always a straightforward process, however once the criteria are met, the company risks being placed into administration or wound up.

Director’s duties in the event of insolvency

A director of a company which is insolvent or approaching insolvency should bear in mind the following issues:

The modification of the general duty

The general duty to promote the success of the company is modified where a company is (or is on the verge of being) insolvent so that a director must act instead in the best interests of the company’s creditors.

Determining, with reasonable certainty, whether a company is in fact insolvent is, therefore, crucial, particularly as commercial decisions in the creditors’ interests can be substantially different to those benefitting shareholders.

Wrongful trading

A director can be ordered by the court to contribute towards the general pool of assets which are available to a company’s creditors where he or she:

  • knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration;
  • continues to allow the company to trade after he or she knew or ought to have so concluded;
  • does not take every step he or she ought to from that time to minimise the potential loss to creditors.

 Directors MUST seek professional advice

A director does not need to have been dishonest to be liable for wrongful trading and he or she cannot avoid responsibility by resigning from the company when potential difficulties are identified. This is a complex area for directors to navigate and proper advice should always be sought.

Business planning for Covid-19 disruption

As the scale and duration of the COVID-19 outbreak remains unknown, directors should take steps to prepare both the company from a commercial perspective but also themselves on an individual level, against any inadvertent breaches of duty.

Both financial and legal advice is therefore recommended to ensure that the board of directors is well-prepared and well-advised in the event that the company falls into insolvency.

Commercial considerations

  • Ensure that the directors have an in-depth understanding of how and where the business operates, and how disruptions might affect the different elements of the supply chain.
  • Review key contracts for, among other things, force majeure clauses. These are clauses which, in broad terms, seek to relieve parties from their contractual obligations in extreme circumstances.
  • Discuss contigency planning with suppliers, to mitigate exposure to risk further up the chain.
  • Carry out regular evaluations of known risks and the company’s crisis management and business continuity planning.
  • If in doubt, seek specialist advice on contingency options in order to have a greater understanding of the risks involved and assess if proposed actions are likely to fall in the wrongful trading territory.

Legal considerations

  • Seek legal advice, independently from the company’s or group’s advisors, when the business is showing signs of financial difficulty. In particular if you think that the company might not be able to meet its obligations under any loans or mortgages.
  • Hold regular board meetings, and take detailed notes of any decisions taken, and the justifications.

For further advice contact Natalie Drought or Martyn Kolankiewicz 

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.