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Distinguish between managing debt and managing operations

Mike Jervis Partner, Restructuring and Insolvency, PwC United Kingdom

We‌ ‌all‌ ‌have‌ ‌events‌ ‌in‌ ‌our‌ ‌lives‌ ‌that‌ ‌we’d‌ ‌rather‌ ‌avoid‌ ‌if‌ ‌we‌ ‌possibly‌ ‌could.‌ ‌For‌ ‌directors‌ ‌of‌ ‌companies,‌ ‌there‌ ‌are‌ ‌two‌ ‌things‌ ‌that‌ ‌tend‌ ‌to‌ ‌be‌ ‌close‌ ‌to‌ ‌the‌ ‌top‌ ‌of‌ ‌the‌ ‌list:‌

One‌ ‌is‌ ‌being‌ ‌forced‌ ‌into‌ ‌a‌ ‌transaction‌ ‌with‌ ‌an‌ ‌external‌ ‌third‌ ‌party‌ ‌to‌ ‌get‌ ‌the‌ ‌company‌ ‌out‌ ‌of‌ ‌trouble‌ ‌–‌ ‌albeit‌ ‌in‌ ‌a‌ ‌challenging‌ ‌environment‌ ‌a‌ ‌commercial‌ ‌deal‌ ‌that‌ ‌ultimately‌ ‌saves‌ ‌the‌ ‌business‌ ‌is‌ ‌preferable‌ ‌to‌ ‌several‌ ‌alternatives.
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The‌ ‌other‌ ‌thing‌ ‌that‌ ‌tends‌ ‌to‌ ‌worry‌ ‌executives‌ ‌is‌ ‌excessive‌ ‌debt.‌ ‌This‌ ‌is‌ ‌a‌ ‌common‌ ‌aspect‌ ‌of‌ ‌business‌ ‌eight‌ ‌or‌ ‌nine‌ ‌months‌ ‌into‌ ‌2020 -‌ ‌the‌ ‌pandemic‌ ‌has‌ ‌left‌ ‌a‌ ‌lot‌ ‌of‌ ‌companies‌ ‌with‌ ‌a‌ ‌huge‌ ‌amount‌ ‌of‌ ‌debt.‌ ‌Those‌ ‌in‌ ‌the‌ ‌hospitality,‌ ‌travel,‌ ‌retail‌ ‌and‌ ‌real‌ ‌estate‌ ‌sectors‌ ‌have‌ ‌been‌ ‌particularly‌ ‌hard‌ ‌hit,‌ ‌with‌ ‌many‌ ‌finding‌ ‌it‌ ‌hard‌ ‌to‌ ‌balance‌ ‌the‌ ‌equation‌ ‌of‌ ‌sorting‌ ‌out‌ ‌the‌ ‌accrued‌ ‌liabilities‌ ‌while‌ putting‌ ‌the‌ ‌business‌ ‌in‌ ‌a‌ ‌state‌ ‌to‌ ‌restart‌ ‌its‌ ‌operations.‌

Government‌ ‌support‌ ‌and‌ ‌forbearance‌ ‌from‌ ‌commercial‌ ‌lenders,‌ ‌landlords‌ ‌and‌ ‌creditors‌ ‌have‌ ‌provided‌ ‌the‌ ‌lifeline‌ ‌that‌ ‌has‌ ‌allowed‌ ‌many‌ ‌to‌ ‌survive.‌ ‌But‌ ‌it‌ ‌has‌ ‌also‌ ‌left‌ ‌a‌ ‌hefty‌ ‌debt‌ ‌hangover‌ ‌that‌ ‌needs‌ ‌to‌ ‌be‌ ‌addressed.‌ ‌There‌ ‌will‌ ‌undoubtedly‌ ‌be‌ ‌a‌ ‌flurry‌ ‌of‌ ‌strategic‌ ‌activity‌ ‌in‌ ‌the‌ ‌coming‌ ‌months‌ ‌as‌ ‌companies‌ ‌seek‌ ‌to‌ ‌stabilise‌ ‌and‌ ‌restructure;‌ ‌the‌ ‌good‌ ‌news‌ ‌is‌ ‌there‌ ‌are‌ ‌healthy‌ ‌reserves‌ ‌of‌ ‌cash‌ ‌available‌ ‌from‌ ‌a‌ ‌range‌ ‌of‌ ‌sources,‌ ‌including‌ ‌private‌ ‌equity‌ ‌and‌ ‌credit‌ ‌funds‌ ‌which‌ ‌have‌ ‌huge‌ ‌reserves‌ ‌of‌ ‌dry‌ ‌powder‌ ‌to‌ ‌invest.‌

So‌ ‌let’s‌ ‌prioritise‌ ‌and‌ ‌rationalise‌ ‌some‌ ‌of‌ ‌the‌ ‌things‌ ‌that‌ ‌will‌ ‌be‌ ‌worrying‌ ‌executives.‌

1. “We‌ ‌have‌ ‌too‌ ‌much‌ ‌on‌ ‌our‌ ‌plate‌ ‌already”‌

Boards‌ ‌and‌ ‌executives‌ ‌already‌ ‌face‌ ‌huge‌ ‌operational‌ ‌challenges‌ ‌as‌ ‌their‌ ‌organisations‌ ‌wrestle‌ ‌with‌ ‌the‌ ‌economic‌ ‌impact‌ ‌of‌ ‌the‌ ‌pandemic‌ ‌and‌ ‌they‌ ‌work‌ ‌to‌ ‌adapt‌ ‌the‌ ‌business‌ ‌to‌ ‌the‌ ‌sudden‌ ‌(but‌ ‌apparently‌ ‌lasting)‌ ‌changes‌ ‌in‌ ‌consumer‌ ‌behaviour.‌

There‌ ‌is‌ ‌a‌ ‌very‌ ‌real‌ ‌risk‌ ‌that‌ ‌dealing‌ ‌with‌ ‌debt‌ ‌will‌ ‌distract‌ ‌management‌ ‌from‌ ‌its‌ ‌focus‌ ‌on‌ ‌operations.‌ ‌Debt‌ ‌is‌ ‌a‌ ‌fact‌ ‌of‌ ‌life‌ ‌and‌ ‌debt‌ ‌comes‌ ‌with‌ ‌responsibilities‌ ‌–‌ ‌regular‌ ‌discussions‌ ‌with‌ ‌lenders,‌ ‌negotiations‌ ‌and‌ ‌renegotiations‌ ‌and‌ ‌so‌ ‌on‌ ‌–‌ ‌that‌ ‌can‌ ‌be‌ ‌a‌ ‌big‌ ‌drain‌ ‌on‌ ‌management‌ ‌time,‌ ‌energy‌ ‌and‌ ‌brainpower.‌ ‌But‌ ‌without‌ ‌viable‌ ‌operations,‌ ‌debt‌ ‌is‌ ‌often‌ ‌“toast”.‌

2. “We‌ ‌are‌ ‌worried‌ ‌about‌ ‌directors’‌ ‌duties‌ ‌around‌ ‌debt”‌

In‌ ‌complicated‌ ‌structures‌ ‌it‌ ‌is‌ ‌not‌ ‌unusual‌ ‌for‌ ‌a‌ ‌director‌ ‌to‌ ‌sit‌ ‌on‌ ‌the‌ ‌board‌ ‌of‌ ‌both‌ ‌an‌ ‌operational‌ ‌company‌ ‌and‌ ‌its‌ ‌holding‌ ‌company.‌ ‌Directors‌ ‌of‌ ‌operational‌ ‌companies‌ ‌are‌ ‌often‌ ‌protected‌ ‌from‌ ‌skirmishes‌ ‌with‌ ‌lenders‌ ‌and‌ ‌financial‌ ‌creditors,‌ ‌but‌ ‌even‌ ‌though‌ ‌a‌ ‌director‌ ‌may‌ ‌be‌ ‌wearing‌ ‌a‌ ‌different‌ ‌hat,‌ ‌the‌ ‌legal‌ ‌obligations‌ ‌in‌ ‌both‌ ‌companies‌ ‌are‌ ‌identical.‌

Further‌ ‌issues‌ ‌arise‌ ‌in‌ ‌international‌ ‌groups -‌ ‌directors’‌ ‌duties‌ ‌might‌ ‌look‌ ‌very‌ ‌different‌ ‌in‌ ‌different‌ ‌countries‌ ‌–‌ ‌and‌ ‌it’s‌ ‌also‌ ‌important‌ ‌to‌ ‌remember‌ ‌that‌ ‌the‌ ‌culture‌ ‌and‌ ‌people’s‌ ‌behaviour‌ ‌around‌ ‌debt‌ and‌ ‌insolvency‌ ‌also‌ ‌vary‌ ‌from‌ ‌country‌ ‌to‌ ‌country.‌

But‌ ‌governments‌ ‌have‌ ‌recognised‌ ‌these‌ ‌stresses -‌ ‌many‌ ‌countries‌ ‌have‌ ‌amended‌ ‌or‌ ‌temporarily‌ suspended‌ ‌some‌ ‌directors’‌ ‌duties‌ ‌as‌ ‌a‌ ‌result‌ ‌of‌ the‌ ‌pandemic.‌ ‌Filing‌ ‌deadlines‌ ‌in‌ ‌the‌ ‌US, ‌for‌ ‌example,‌ ‌were‌ ‌extended,‌ ‌and‌ ‌the‌ ‌obligation‌ ‌to‌ ‌file‌ ‌for‌ ‌insolvency‌ ‌was‌ ‌suspended‌ ‌in‌ Germany‌ ‌under‌ ‌specific‌ ‌circumstances.‌ ‌In the UK, the wrongful trading provisions have been temporarily suspended again; ‌there‌ ‌are‌ ‌also‌ ‌other‌ ‌changes‌ ‌brought‌ ‌in‌ ‌by‌ ‌the‌ ‌new‌ ‌Corporate‌ ‌Insolvency‌ ‌and‌ ‌Governance‌ ‌Act‌ ‌2020,‌ ‌including‌ ‌the‌ ‌introduction‌ ‌of‌ ‌a‌ ‌new‌ ‌restructuring‌ ‌plan‌ ‌and‌ ‌a‌ ‌short‌ ‌moratorium‌ ‌to‌ ‌allow‌ directors‌ ‌to‌ ‌consider‌ ‌their‌ ‌options.‌

So‌ ‌how‌ ‌can‌ ‌company‌ ‌boards‌ ‌best‌ ‌protect‌ ‌operations‌ ‌and‌ ‌keep‌ ‌on‌ ‌top‌ ‌of‌ their‌ ‌duties?‌ ‌One‌ ‌option‌ ‌is‌ ‌to‌ ‌let‌ ‌expert‌ ‌advisers‌ ‌take‌ ‌the‌ ‌strain‌ ‌in‌ ‌dealing‌ ‌with‌ ‌stakeholders‌ ‌on‌ ‌the‌ ‌debt‌ ‌side‌ ‌of‌ ‌the‌ ‌equation.‌ ‌Over‌ ‌the‌ ‌summer‌ ‌we’ve‌ ‌worked‌ ‌with‌ ‌companies‌ ‌in‌ ‌a‌ ‌wide‌ ‌range‌ ‌of‌ ‌sectors‌ ‌to‌ ‌secure‌ ‌funding‌ ‌and‌ ‌their‌ ‌future‌ ‌while‌ ‌management‌ ‌focuses‌ ‌on‌ ‌the‌ ‌operational‌ ‌challenges‌ of‌ ‌repairing,‌ ‌rethinking‌ ‌and‌ ‌reconfiguring‌ ‌the‌ ‌business.‌ ‌Even‌ ‌companies‌ ‌in‌ ‌the‌ ‌hardest-hit‌ ‌sectors,‌ ‌who‌ ‌felt‌ ‌themselves‌ ‌staring‌ ‌into‌ ‌the‌ ‌abyss,‌ ‌have‌ ‌been‌ ‌able‌ ‌to‌ ‌carry‌ ‌on‌ ‌operating‌ ‌throughout‌ ‌the‌ ‌pandemic ‌as‌ ‌we‌ ‌work‌ ‌behind‌ ‌the‌ ‌scenes‌ ‌to‌ ‌restructure‌ ‌their‌ ‌debt‌ ‌and/or‌ ‌negotiate‌ ‌third‌ ‌party‌ ‌funding‌ ‌deals‌ ‌to‌ ‌secure‌ ‌their‌ ‌future.‌

Business have been enormously resilient during these extraordinarily difficult months. They have been resourceful - adapting the business, cutting costs, and exploring new adventures for cash - and more brave than I have seen in previous several recessions. The great news for recovery is that

  1. there is liqudity waiting for a home,
  2. management can use advisers to access it (and have more time to focus on the business) and
  3. governments have realised and addressed concerns around directors' duties.
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