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.
Employers 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 if found guilty, they may be subject to an unlimited fine and/or disqualification from acting as a director.
Regulated businesses have also 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.
Major legislative changes to insolvency law will also impact directors. Office holders in insolvency proceedings (i.e. administrators or liquidators) will be able to sell certain claims (not including employment claims) against directors to third parties. Such claims 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.
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) must be vigilant to ensure the decisions they take comply with the strict provisions of the law.
In the case of redundancy consultation, there is a perceived conflict between employment and insolvency provisions meaning that, in practice, all legal provisions are unlikely to be followed as insolvency practitioners prioritise dealing with consultation quickly in order to save the business and reduce further costs.
In its November 2015 response to the call for evidence (on collective redundancy consultation for employers facing insolvency) the government’s position was that there is no conflict between insolvency law and employment law. However, it does acknowledge the perception that tensions do exist which may impede effective consultation from taking place when redundancies are proposed in an insolvency situation. Rather unsatisfyingly, the government has simply committed to carry out further work to address points raised in the responses without setting a deadline to do so.
So who needs to be concerned? We are noting trends in certain key sectors which may require directors to carefully consider their position:
- Treasury companies. Directors of a special purpose company (the classic example being a treasury company within a corporate group) 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 to 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 have seen situations where, as a result of reductions in income from government contracts (healthcare or PPP/PFI being classic examples), fees received by a private sector company 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. In this sector, it is not uncommon for projects to experience delays or issues about service provision which result in claims for liquidated damages being referred to adjudication. The timing of adjudications and the adverse consequences for companies if such claims are upheld can result in cash flow issues, which create obvious concerns for the directors (as it could impact the ability of the company to make payments to other stakeholders/lenders).
- Energy & power. The income of companies which support the Oil & Gas/commodities sector is 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. 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 are challenged by alternative suppliers and reductions in footfall. The increase in wages is also causing particular strain. The London living wage is £9.40 and even the national living wage (for those aged 25 and above) will be £7.20 from April 2016.
A benign economy and low interest rates also provide challenges. 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 changes 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 they 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. Kornhaas v Dithmar (Case C-594/14) highlighted 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.
