Five tips for corporate directors to navigate distressed companies through the COVID-19 crisis.

1. Get an overview

Get a clear picture of the company’s situation. It is necessary to have an overview to know where to act. This should as a minimum include who the company owes money, which contracts are critical for the company and not least the current and future liquidity need. It should also be clarified whether the company can rely on the government’s bailout packages, including salary compensation, special aid for independent business owners, postponed VAT and tax payments and compensation of fixed expenses.

2. Be proactive

When the overview and basis for decision are in place, it is time for the directors to be proactive. We recommend that they contact the company's bank, suppliers, cooperation partners, the Danish Debt Collection Agency and other creditors; both in order to obtain a payment arrangement and to adjust future obligations in existing contracts. It should be examined whether force majeure may be claimed as a suspension of obligations exempt from liability. A proactive approach is an important success criterion in practice, e.g. to obtain a payment arrangement. It is better to be at the forefront than lag behind.

3. Considerations and decisions must be recorded

There must be a basis of liability before the management risks being held personally liable. If a business (error of) judgment results in a loss for the company and its creditors, the courts are generally reluctant to establish liability in damages. However, this requires that the directors have acted in the interest of the company, and that they have made well-considered decisions on an informed basis. The rule is called “the business judgment rule". In practice, the directors should always ensure written documentation of their considerations and decisions.
Generally, all creditors must be treated equally. Individual creditors may not be given special preference, unless they have a special preferential status. Salaried employees (not the executive officer) have such preferential status, and it is therefore typically not negligent to pay salary and A tax.

The company’s operations may not continue beyond the so-called point of hopelessness - the time when there are in fact no prospects of a solution. The directors may be personally liable if credit purchases are made at a time when they know that it is not possible to pay. If there is no longer any hope, the directors must suspend operations.

4. Bankruptcy or restructuring

In the given circumstances, an insolvent company may be declared bankrupt or apply for restructuring. The difference is that while the primary purpose of bankruptcy is to wind up the company, the purpose of restructuring is to save - viable - companies.

Naturally, bankruptcy should be avoided. If all possibilities have been explored, and continued operations are hopeless (e.g. entirely independently of the COVID-19 situation), it may turn out to be the only responsible solution.

An application for restructuring requires in practice that there have been prior thorough discussions about the possibilities of carrying out a transfer of the business or offering the creditors a compulsory composition, alternatively a moratorium, with the largest creditors with controlling influence, who have declared that they accept the proposed solution. This may be combined with an investment of capital from investors and/or a change of ownership. However, it is decisive that the company is estimated to be profitable and viable. The risks of a restructuring must be considered carefully as it may be a costly procedure that may result in liability for the restructuring administrator in case arrears are accumulated.

5. Keep calm

This quite extraordinary situation affects all operators in trade and industry. However, creditors and public authorities are prepared to help companies manage the crisis. Therefore, our message is first and foremost: Keep calm!

contacts

Nicolai Dyhr

Partner

Piya Mukherjee

Partner