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Rebooting the economy: key legal considerations for businesses

Rebooting the economy: key legal considerations for businesses 1

By Ian Borman, Partner, Winston & Strawn 

With the UK government slowly lifting the lockdown, businesses are having to wrestle with some fundamental questions and prepare to navigate the choppy waters of the post-Covid-19 economy. According to the Office for Budget Responsibility (OBR), the UK is heading for its deepest recession in 300 years.

So far, UK Government’s efforts to support businesses have been loans and other forms of credit within existing legal structures. However, we are at the beginning of a new phase in the response, with UK Government proposals to relax wrongful trading rules and introduce a company moratorium likely to come into force shortly. Moves to ensure that supply chains for businesses remain functional are also being proposed, with a Government scheme to replace credit insurance with Government support and rules to stop business ceasing to trade with businesses that are in insolvency proceedings.

These schemes challenge the way businesses under stress operate and, whilst increasing the breathing space for businesses and directors under severe pressure, they also open up new uncertainties for other businesses trading with and financing those businesses.

The background to these developments is that businesses have really only begun to experience the financial impact of the enforced economic slowdown. Many have calculated that they will survive through to the end of summer, assuming ongoing relaxation through that period, but the backdrop for business recovery is stark.

To give themselves the best possible chance of surviving, business need to plan around three key corporate financing needs.

  1. Direct Costs
Ian Borman

Ian Borman

Firstly, there are the direct expenses incurred whilst shutdown continues. Businesses that have shut down quickly continue to have liabilities to suppliers, landlords and employees without income to support those expenses. Even businesses that have apparently benefitted from the disruption, such as online delivery platforms and supermarkets, have had to foot the bill on exceptional costs, many of which may not be recoverable or ultimately contribute to profitability.

These costs have depleted cash reserves, driving an almost universal search for liquidity from banks and the bond markets. Even businesses with naturally large cash resources are looking to raise funds. A small proportion of these debts are in the form of government grants, but many are being absorbed in the form of debt that will remain long after the crisis has averted.

  1. Ramp up

As we emerge from the crisis, it is unclear how long the return to normality will take and it is unlikely that many businesses will return to usual levels in the short term. For some it may be quick, but for others this may lead to a period where activity returns to pre-crisis levels slowly.

Through this ‘ramp up’ phase businesses will still be incurring ‘usual’ running costs. They may be able to trim maintenance and investment expenditure, but this will also harm asset condition and future growth potential. Businesses which are able to maintain investment are those most likely to be able to take advantage of opportunities and benefit in the longer term.

In the initial phase, some of these continuing costs will have been met by cash receipts from  previous trading, which in the ordinary course would have been used to fund the business, investing in stock, materials and work-in-progress. With those cash receipts spent elsewhere, businesses will need to find the cash to fund working capital and restart their supply chain whilst facing uncertain demand.

Businesses also drive efficiencies by accurately predicting demand to avoid waste. As we saw at the start of the crisis, whilst supermarkets have now got to grips with the situation, they initially struggled to adjust to changing demand as they rely on just-in-time delivery and demand modelling in order to stock shelves.  But a host of industries now rely on low stocking levels and supply chains to drive profitability

Without having an accurate means of assessing demand, businesses will need to make judgements regarding business levels, and perhaps lose out on opportunities where they under provide or wastage where they over-provide. Businesses that are highly integrated with their supply chain will also be exposed to any weak links in that supply chain which might fail give the current stresses.

  1. Rightsizing

It seems likely that, as we come out of the crisis, a substantial number of businesses will have ceased to trade. For some this will create opportunities to grow to replace those businesses, but for others it will leave them without the same customer base in the short term or for the foreseeable future. Other businesses will simply not be able to sustain the levels of debt they have incurred dealing with the crisis.

In either case, those businesses will need to create or accelerate plans to rightsize their business.

However, the process of completing restructuring plans almost always leads to costs itself. These take many forms, but in a European context the most obvious item is redundancy costs. But others would include:

  • investments in more efficient equipment
  • the cost of moving production lines to lower cost countries
  • shut down costs of sites or business lines
  • renegotiating with landlords to reduce rent to market levels
  • the costs of stripping out and repairing leased premises on surrender
  • refinancing costs and waiver or amendment fees

These processes typically also accelerate costs such as environmental clean-up or pensions entitlements and, as well as cash costs, have significant costs in terms of management time and consultancy fees.

As a result of the above pressures, while we may start to see an easing of lockdown restrictions, businesses are only beginning to deal with the cash impact of COVID-19.

 Solvency

Businesses with low financial indebtedness will be best placed to raise the financing needed to meet these costs. Ultimately businesses will need to seek to remain solvent through the whole process of responding to COVID crisis.

Each country has its own definition of solvency and rules on when management can be held liable personally for trading when they know a business is or may become insolvent, but these rules exist in all jurisdictions. Solvency will generally be determined by two factors: whether a company can continue to pay it creditors as they fall due (known as the ‘cash flow’ solvency test); and whether the aggregate of the company’s liabilities exceeds its assets (known as the ‘balance sheet’ solvency test).

Generally, if a business can continue to pay its debts as they fall due it will be permitted to continue to trade. However, in some countries (notably Germany) management are require to file for insolvency as soon as they are aware, or should be aware, that the balance sheet test is being breached. It is interesting to note that now seeing modification to the insolvency tests in almost all countries.

Funding

On the surface, Government schemes to fund working capital and maintain solvency are very welcome but will need to be available to fund all of the above costs outlined above if they are going to be successful. However, if it leaves businesses with such high liabilities that they are not solvent or the medicine has the potential to kill the patient.  These claims will often sit alongside stretched payables, including unpaid rent.

Businesses have come to this crisis with very different balance sheets. Some will have significant existing debt and for those it is already proving challenging to fit debts under the Government schemes alongside existing debt packages. By their very terms the Government schemes require that businesses being funded have ceased to be viable as a result of COVID-19 – at least in the short term. To the extent repayable debts under the Government schemes are going to have to be absorbed into wider balance sheets at the same time as businesses are dealing with the pressures already outlined.

Some businesses may be lucky enough to be funded by existing debt and equity funding sources, but others will need to access additional funding either from debt or, at some point, equity funding. There are a wealth of sources for healthy business to choose from. On the debt side the choices for most companies will be either bank debt, non-bank lenders or debt capital markets funding. All of these can be accessed as either unsecured or secured debt, for those with higher leverage. They can also be accessed in the form of asset-backed loans which are being used more since they have an improved capital treatment for regulated lenders and by their nature such facilities help to control leverage to manageable levels.

If an equity funding is required, the right solution will likely be more bespoke and depend significantly on the size of the company. Existing investors in public or private companies can be asked to fund companies but the most controversial aspect will be the extent to which existing shareholder are diluted by new funding. Generally, existing shareholders can protect themselves by exercising pre-emption rights and subscribing for the new capital, but this requires them to have the capital to invest in the new round.

Restructuring

The greatest challenge in these situations will always arise if businesses cannot demonstrate to investors that they are financially healthy or otherwise investable. This can be through a range of factors, not all of which are obvious. For instance, businesses:

  • may be over-indebted, either through COVID funding or changes in the business environment. If businesses run out of cash, despite COVID funding, before business starts to recover this will be the case;
  • may have other liabilities weighing on them such as environmental liabilities or defined benefit pension liabilities, or perhaps historic leases on off-market terms;
  • may have ongoing litigation, which may or may not be determined in their favour;
  • maybe undergoing regulatory investigations or have operated in jurisdictions that have become subject to sanctions, which makes it very difficult or impossible to access funding from certain sources. This has become increasingly likely as sanctions regimes have been changing more quickly.

All of these may ultimately mean that a business may have to cease to trade and go out of business. Or, more positively, may seek to restructure either through consensual negotiation with creditors for a debt for equity swap or other debt restructuring, or through more formal processes such as a company voluntary arrangement (CVA) or pre-packaged insolvency which allows the business to continue with reduced liabilities.

The crisis has had a different effect around the world. Some groups of companies may have divisions or regions that are impacted in different ways and, on the face of it, they may be able to dispose of or shut down part of the group. However, many groups will have cross-guarantees or structural issues that mean restructuring will have an impact beyond the part of the business that is directly affected, even where those businesses appear to be held in separate companies, making this far more complex.

Conclusion

The economic ramifications of COVID-19 are not yet clear, but as we move through the fast-changing crisis businesses will need to respond to the changing landscape, identifying both challenges and opportunities and adapting accordingly.

So far, the business response to COVID-19 has been broadly successful, but the challenges that will emerge as the financial effects emerge will be complex and real. The most successful businesses will see the crisis as an opportunity for renewal, while remaining flexible for new challenges as they emerge.

Business

Return to work: Flexibility, preparation and communication are key

Return to work: Flexibility, preparation and communication are key 2

By Matt Weston, Managing Director, Robert Half UK

As lockdown restrictions ease for the foreseeable future, conversations across the business world are starting to turn to how employers can safely and seamlessly prepare for their workforce to return to the office.

Research from Robert Half has found that over half (54%) of employees are worried about working in close proximity to their colleagues, while a similar proportion are eager to return to the office due to loneliness working from home (45%) or concerns about missing out on career opportunities (30%).

Unsurprisingly, after everything companies and their employees have done to successfully adapt their operations and working practices to social distancing rules over the last few months, immediately returning to the old ways of working will likely neither be sensible or practical. With safety being the key priority for the ‘new normal’ of office life – communication, flexibility and preparation should be the main focus areas for employers.

With this in mind, what are the challenges and opportunities that employees anticipate as they prepare for the return to work, beyond government and industry supplied health and safety best practice? Furthermore, how can employers best support their staff during this period?

Keep people at the heart of change

It is important to recognise that your workforce has been working through an intense period of uncertainty and change for months, which can be incredibly unsettling. On top of this, working for weeks in isolation without the usual physical interactions with team members could be potentially detrimental to employee engagement and mental wellbeing.

Having adjusted to keep staff connected with one another from a distance with virtual team building exercises, video calls and daily check-ins, as teams begin working in hybrid models with some in the office and others remote, staff engagement will need to adapt again.

Managing people with greater sensitivity and maintaining positivity throughout will be crucial. To help instil a sense of normality and engagement, encourage maximum collaboration between individuals (in accordance with social distancing rules), and make sure teams feel part of company goals and opportunities through regular meetings and communication – no matter their location.

Continuing to invest in technology and offering flexibility will also be important to ensuring that people can continue to work remotely or on-site, either in accordance with their own wishes or as part of your staggered return-to-office plan.

Communicate, communicate, communicate (and listen)

Reassuring staff that they are able to safely return to the office will require continuous communication. From expectations of the physical office, to expectations of how to operate within hybrid teams, these new expectations and new workplace requirements should be communicated to all staff clearly to avoid confusion.

Regular email updates, updates on the company’s intranet and social media channels, as well as frequent town hall meetings (either online or in a smaller setting) could be key elements of an effective communications approach.

Also, consider a feedback channel to allow staff within the team to offer thoughts on their experience of returning to the office and any suggestions on improving the process. Whether on a company-wide basis or a team-by-team approach, schedule regular check-ins to engage with employees’ questions and concerns.

Maintaining open communication channels with your team will be essential for keeping up employee morale and ensuring clarity. For example, if some employees aren’t comfortable with coming to the office every day, then they should have plenty of opportunities to voice their concerns and have them dealt with promptly, respectfully and fairly.

Staggered return-to-office planning

Depending on the size of business and density of office space, maintaining home working arrangements across teams on an alternating basis could make it easier to implement safe social distancing. This involves select teams working remotely while others work on-site on any given day.

An alternating approach to remote working might also reduce the risk of staff feeling pressured or overwhelmed by an immediate return to the office five-days-a-week. After all, some families might be juggling temporary disruptions to childcare arrangements and public transport systems will likely become crowded again. So, a transitionary period will help everyone adjust to post-lockdown office working.

Finally, if you have developed your technology infrastructure to facilitate remote working, you would do well to continue to leverage these new capabilities as in all probability, a mixture of remote and at-office work will be needed for some time.

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Business

Contis enters RBS Capability and Innovation Fund bid seeking £35 million for disruptive SME growth strategy  

Contis enters RBS Capability and Innovation Fund bid seeking £35 million for disruptive SME growth strategy   3

Leading payments provider, Contis, has applied for two grants from the RBS & BCR Alternative Remedies Package, totalling £35 million.  

Unlike most applicants who will deploy funds through a single brand, Contis is taking a completely different approach. The funding will be used to drive fintech innovation in the UK by developing an off the shelf, B2B electronic and card payment technology platform for SMEs. With Contis’ powerful tech stack and regulated status, this will empower hundreds of fintechs to support the SME market with groundbreaking technologies, payments and lending capabilities. Contis today services over 800,000 consumer accounts, 14,500 business accounts and processes £4bn in transactions per year, demonstrating a proven track record.   

UK businesses are facing a challenging economic environment with the impacts of Covid-19 and Brexit. As large corporations and entire sectors are affected, SMEs will play a vital role in the recovery. Contis’ approach is completely disruptive, offering three channels to maximise support for SMEs and sole traders, through three unique brands, all powered by APIs from Contis’ modular and configurable engine. 

1.       Canvas for Business 

Contis is a super-vendor in the world of fintech, offering payments through proven banking rails and card scheme capabilities including issuing pre-paid, debit and virtual cards. They’re linked to digital delivery like Apple Pay and Google Pay, and a trusted tech stack that boasts 99.99% uptime.  

With funding from the Capability and Innovation Fund (CIF), Contis’ technology and regulated services will be made available to the whole fintech community, enabling them to provide dedicated SME accounts with the latest leading-edge capabilities delivered via Contis’ wholly owned, secure, cloud-based technology and apps. Contis’ solution has a firm eye on the need for SMEs to compete internationally, particularly after Brexit, and offers FX integration as standard.  

Canvas for Business will increase competition by providing fintechs serving the SME market with technology that outstrips the big banks. Contis will also provide credit referencing capabilities and empower fintechs to lend to their SME client base through Contis’ own credit licence. Without the constraints of legacy systems, it will enable simple connectivity to accounting and payments solutions, as well as to unlimited future innovations.  

2.       Engage for Business 

Over 150 Credit Unions currently use Contis’ Engage service and technology, and hold an estimated £400 million in undeployed cash reserves. Developed with CIF funding, Engage for Business will enable Credit Unions to launch business accounts and payments products for the first time, and allow excess funds to be redeployed in the SME sector through business support loans. This will revolutionise access to funding for sole traders and small businesses. 

3.       Freedom for Business 

With CIF funding, Contis will also offer large scale SMEs a direct-to-market solution where Contis holds the relationship and provides a bespoke offer to meet the business’ exact needs. 

Contis’ application to the Capability and Innovation Fund is focused on creating the widest possible impact for UK SMEs by fulfilling their accounts & payments needs and driving innovation in SME financial services. 

Through the grant, Contis will empower over 200 fintechs and Credit Unions to provide credit, simplify payments integration into everyday business needs, offer digital credit referencing, provide budgeting tools to SMEs, enable automated payments, give predictive insight on cash flow, provide rewards to SMEs on spending, and much more. 

Peter Cox, Founder and Executive Chairman of Contis said: “Our mission is to democratise payments and financial services for all SMEs, so they’re spoilt for choice with innovative and affordable solutions that meet their exact needs. Our approach, based upon proven technologies, will broaden and disrupt the services available to SMEs far beyond the capabilities of existing providers such as the big banks.  

“By driving competition and innovation, while improving the availability of funding, our approach will increase the services on offer to SMEs and make them more affordable, therefore becoming easier for every entrepreneurial person with vision to run their own businesses.” 

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Business

Four years of digital transformation in four weeks: UK lockdown puts pressure on brands to digitally deliver

Four years of digital transformation in four weeks: UK lockdown puts pressure on brands to digitally deliver 4

Nearly a third (32%) of consumers would switch providers if a brand’s website is unavailable for more than 24 hours

A study released today reveals the scale of omni-channel pressure brands now faced as a result of the Covid-19 pandemic, as consumers flock to apps and websites to as the priority destination to transact with brands.

The UK has experienced a huge leap in use of online services thanks to lockdown, with the public appearing to have less concern for the availability of a brand’s physical location. Research by Sungard Availability Services (Sungard AS) uncovers a “window of availability” that UK businesses now have before consumer loyalty changes:

  • If a brand’s website is down for 24 hours – 32 percent of consumers would switch provider
  • If a brand’s app is down for 24 hours – 28 percent of consumers would switch provider
  • If a physical store is closed for 24 hours – 20 percent of consumers would switch provider

The results by industry paint an interesting picture of the availability timeframes brands are expected to adhere to:

  • For online retailers, excluding grocery retailers – 23 percent of consumers would switch provider if they could not access online services for 12 hours, rising to over a third (34 percent) after 24 hours
  • For financial services and entertainment streaming platforms – 21 percent of consumers would switch provider after 12 hours, rising to 33 percent after 24 hours
  • In the case of online grocery shopping – 20 percent would switch provider after 12 hours, rising to one third 33 percent after 24 hours

The findings also highlight that as digital reliance increases, so will consumer expectations towards availability in the future. Over the coming two years, a third (33 percent) of consumers expect online financial services to always be available, rising to 35 percent for streaming services.

“UK consumers have become reliant on the constant availability of online services, and lockdown has only served to heighten this,” comments Chris Huggett, SVP, EMEA at Sungard AS. “What used to be a choice between physical and digital has now firmly accelerated into digital environments across various industries. As online worlds continue to outpace bricks and mortar as the face of businesses, ensuring constant availability and clear communications on downtime will be key for brands to build trust and loyalty.

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