With the oil price tumbling, a slowdown in China, an unstable position in Greece, commodity prices at an all-time low, a poor Christmas for fashion retailers on the high street, an overheated property market and a looming BREXIT referendum, 2016 bears all the hallmarks of a tumultuous year.
Clients are navigating a course amidst the turmoil and as if this were not enough, there is the added concern of regulatory scrutiny, directors (and an insolvency practitioner) being prosecuted for failure to comply with redundancy notification to the Secretary of State – a trial which is due to start this Spring - and major legislative change to insolvency law which will impact directors. Those wide ranging changes allow office holders in insolvency proceedings to sell certain claims against directors to third parties (see our law now). All these are claims which could hitherto only be made by the insolvency practitioner and (in certain instances such as wrongful trading), could only be brought by liquidators as opposed to administrators and liquidators. Regulated businesses come under increased scrutiny as the Treasury recently announced plans to extend the Rules of Conduct under the Senior Managers Regime to non-executive directors in PRA and FCA regulated firms.
The culmination of all these changes has brought to the fore some competing tensions and uncertainties between insolvency law and a desire to foster and encourage an entrepreneurial culture. The effect of these changes will mean that henceforth directors (both executive and non-executive) will be more concerned to ensure that decisions which they take comply with the strict provisions of the law (albeit that in the case of consultation on redundancies on which the prosecution referred to above is based, that is not possible) or whilst the company is in the twilight zone to ensure that they take clear and robust advice to avoid (with the benefit of hindsight) office holders selling claims to third parties. So who needs to be concerned? We are noting trends in certain of our key sectors, some of these which may cause directors to want to consider their position:
- Treasury company – if you are a director of a special purpose company (the classic example being a treasury company within a corporate group) you will need to consider very carefully the obligations of that SPV (distinct from other companies in the group) to understand whether it should for example take monies from one profitable company to lend it to the less profitable parts of the group which may be struggling. If the struggling companies cannot meet their obligation to repay, the directors of the SPV will be asked some probing questions about why they loaned the money;
- Government backed contracts – we see situations where as a result of reductions in income from government contracts (healthcare or PPP/PFI being classic examples) the fees being received by the private sector are reduced without the ability to cut overheads. Ultimately directors of corporates who are parties to such contracts need to be concerned that this will not give them cash flow issues which could result in their being unable to meet financial obligations;
- Construction sector – we see projects where there are delays/issues about service provision resulting in claims for liquidated damages and the disputes relating thereto being referred to adjudication. The impact of timing for such adjudication and the consequence for companies if such claims are upheld can result in cash flow issue which creates obvious concerns for the directors (as it could impact the ability of the company to make payments to other stakeholders/lenders);
- E&P companies – the income of companies which support the O&G/commodities sector are being severely impacted by the collapsing oil/commodity prices. The changes in the upstream oil and gas companies (e.g. downsizing and reducing capital expenditure) are causing particular difficulties for those companies and others who are servicing the sector;
- Retail – poor Christmas trading for fashion retailers on the high street and the widespread behavioural transfer of customers to shopping online, are causing all sorts of issues for the retail sector. The high street retailers are saddled with expensive leases and (in some cases) valuable properties where they are “holding over”. As retailers consider the next 12 months we are noting concern surrounding some of these issues;
- Hotel, hospitality and leisure – businesses challenged by alternative suppliers, reductions in footfall and the London living wage are experiencing particular strain.
The impact of these challenges on corporates and directors are being affected by a benign economy and low interest rates. Low interest rates are of course positive. But there is little doubt that certain sectors are suffering strain or at least need to be aware/pre-empt how the market charges could impact their business. Forewarned is forearmed and directors can (and should) consider and take protective action to ensure that if decisions are ever looked at in the rear view mirror that the decisions can be justified.
Aside from all of the above, recent case law has highlighted another increasingly relevant issue for directors of companies operating in multiple jurisdictions. The impact of the case of Kornhass v Dithmar (see our law now) is that directors need to consider carefully which laws will govern their liability should the company face insolvency. Directors of such companies need to be aware of the laws governing their actions and liability not only in the jurisdiction of the company’s incorporation, but also in those jurisdictions in which the company operates. This is particularly the case where the company’s COMI (i.e. centre of main interest) is likely to be located in another jurisdiction or where the COMI of the company is shifted to another jurisdiction. CMS’s extensive European footprint allows us to provide comprehensive cross-border advice to our clients on these issues.
We work with our sector experts to understand the key issues impacting our client’s world. If we can be of any help, even for a brief initial assessment, please do reach out either to Rita Lowe or your usual contact.