Can you sign a declaration of being unable to pay your wages and continue to trade to avail of the Coronavirus subsidy?

by | Mar 27, 2020

The Legal difficulty of trading while insolvent

Some Lawyers may find it difficult to recommend employers taking up the new subsidy to be paid by the government to keep staff on your payroll  Richard Grogran explains the conflicting position in this article which essentially says you expose yourself by claiming that you are insolvent and that you are recklessly trading.  Where businesses are closed, we recommend that you layoff staff in a fair and transparent basis and in accordance with procedures, you can avoid any exposure and preserve your cash to the maximum extent. The Revenue have been explicit on their last announcement “An employer that has been hit by a significant decline in business but has strong cash reserves, that are not required to fund debt, will still qualify for the Scheme but the Government would expect the employer to continue to pay a significant proportion of the employees’ wages”. The problem here is that if you are closed, what constitutes a significant proportion of wages and if you don’t know how long the situation will last you may be putting your company under undue distress. On the other hand, you may wish to hold on to your employees and feel the investment is worth it.

If you need to rightsize your business to meet current business levels, you should go on short term working and avail of the government subsidy.  You may find yourself in a position of having to service your customers but you have no income coming in. What do you do then?

Lots of activity but no income

You may be servicing your customers at an increased level as a result of the crisis, perhaps you are an outsourced service or having to reschedule bookings etc. Your staff are extremely busy, but your income has dried up.  You are unsure if you have a business or not in the longer term. In this situation, it is best to put yourself in the position of being the receiver of your business. You are may in fact be working on behalf of your creditors.  Remember creditors have a hierarchy and the Revenue, Rates and Employees are all preferred creditors.  The Revenue has clearly given you forbearance based on the schemes they have introduced recently. It would be wise to examine and document your decision to continue to trade based on the following principles from Professor R.M. Goode 1990.  If you are facing this possibility in your business, consider these principles very carefully.

Practical messy decisions

In my experience, many businesses have survived the impossible by having good advisors and using the principles below properly. Having real and meaningful and truthful conversations with their trade creditors is an essential part of gaining forebearance of your creditors. Burying your head in the sand is the worst option you can pick. You may continue to spin the plates for some time, however, I was reminded by a great friend of some advice I gave as we muddled through the last recession. We saved the business in the last crash and it went on to do very well.  My advice back then was, you go bust slowly and then very quickly, so act faster than you think you should.  The other thing to bear in mind is that most liquidations of smaller business are taken out by the Revenue. The liquidator is obligated to file a report and looks back over decisions made over the past 18 months. Protect yourself, document your decisions based on the principles below. Better again talk with your TAB mentor / Business Advisor / Coach / Facilitator/ Board. Two heads are better than one, try 7 or 8!

Better again talk with your TAB mentor / Business Advisor / Coach / Facilitator/ Board. Two heads are better than one, try 7 or 8!

 

HOW TO AVOID LIABILITY FOR WRONGFUL[1] TRADING

 

(From Principles of Corporate Insolvency Law by Professor R.M. Goode, 1990)

 

What practical advice should be given to a director as to the steps he should take to minimise the risk of being found guilty of wrongful trading?  Here is my list of twelve points for survival!.

 

(1)        Do not assume that the safest course is to stop trading.  You have to take every step which can be properly expected of you to minimise loss to creditors.  You can be faulted just as much for a premature cessation of trading as for continuing to trade while insolvent.  This makes it essential to obtain competent outside advice as to whether to stop trading or continue.

 

(2)        Consider carefully with your fellow directors whether the business is viable.  If it is, insist on the preparation of

 

(a)        a business review

 

(b)        a sensible and constructive programme to reduce expenditure, increase, income must ensure an adequate cash flow and restore the company to profitable trading, disposing of unprofitable or marginal parts of the business and dismissing staff who are surplus to the company’s needs or who are not doing their job.

 

(3)        Insist on frequent board meetings.

 

(4)        Make sure that there is a proper distribution of responsibility within the company.

 

(5)        Ensure that the accounts are being properly kept and up to date or if not, that steps are being taken to do so, with outside help being brought in when necessary.

 

(6)        See that the board regularly receives an updated budget and a full, accurate and up to date picture of the company’s trading and financial position.

 

(7)        Get the company to take appropriate outside professional advice on suitable remedial measures.

 

(8)        Keep major creditors regularly informed and enlist their support for the continued operation of the company where this is likely to be of benefit to the general body of creditors.  In this connection it is just as important to have the support of major unsecured creditors as of secured creditors, for it is the former who are most likely to suffer loss and whose support makes it easy for you to show subsequently that you took every step available to you to minimise loss to creditors.

 

(9)        Ensure that you are kept fully in the picture and, so far as possible, that all directors agree on what needs to be done.

 

(10)      Consider the advisability of applying for an Administration Order[2] in order to give the company breathing space, or alternatively of inviting a bank holding a floating charge to appoint an Administrative Receiver to manage the company[3] thus discouraging individual creditors from precipitate action.  Such appointment has the further advantage of ending your management responsibilities though you still have a duty to co-operate with the office holder[4].

 

(11)      Insist that all recommendations for remedial action made by the directors (and particularly by you) together with your dissent from any unwise actions or inactivity advocated by your fellow directors are fully minuted or otherwise placed on the record e.g. by the circulation of a memorandum to other directors.

 

(12)      If you are in the minority and your recommendations are repeatedly rejected, so that the company is getting deeper into the mire, resign and record your reasons for doing so in a letter.  Resignation is very much the last resort.  A director who simply resigns without having taken every step he should have done to minimise loss to creditors will not escape liability.  So do not resign before you have gone as far as you can in getting things put right.

 

[1] “Wrongful Trading” is similar to the concept of “Reckless Trading” in Irish Law.

[2] Comparable, but different, in certain ways, to the appointment of an examiner.

[3] In Ireland, this would be the appointment of a receiver and manager.

[4] i.e. the examiner or receiver and manager.

 

 

SHARE THIS ARTICLE