We live in uncertain times, where many companies face challenges brought about by the sudden and wide-ranging economic impact of COVID-19. Despite government measures to alleviate some of the financial consequences, it is inevitable that many boards face unprecedented situations and challenges ahead. Your company’s financial distress may be a challenging time in which critical, yet prudent decisions must be made. This tip sheet may focus your mind on best practice in these difficult circumstances.

What are your duties during financial distress/insolvency?

The board of a Dutch company has a duty to act in the interest of such company and its joint stakeholders, including shareholders, employees and its creditors. When doing so, the directors are required to act in accordance with Dutch law as well as the company’s articles of association and associated board and policy regulations. This continues to apply in a situation of financial difficulties but the stakes are much higher because if the company nevertheless fails its almost inevitable that the directors conduct will be put under the microscope with the obvious threat of personal liability.

What are some things you as a General Counsel can do to protect the board?

Here are our “top ten” practical steps where your company’s financial position is deteriorating:

  1. Meet regularly and stay informed: appropriate board minutes are a particularly important way of demonstrating you have complied with your duties. Remote meetings and telephone calls are widely accepted means of making board decisions and provisions for such are included in most articles of association. Also check the terms of the company’s D&O insurance to ensure it provides adequate cover for the directors.
  2. Seek professional advice: obtaining expert advice relating to waivers, standstills, new finance, employee obligations, customer and supplier arrangements, compliance (including continuing disclosure obligations), asset valuations and a restructuring or insolvency proceedings can help reduce the scale of any losses, minimise the risk of your liability, and avoid management being distracted by the consequences of non-compliance.
  3. Consider whether to continue trading: a director may be personally liable for all or any of the debts of the company where he is found to have carried on the business for the purpose of defrauding or prejudicing creditors. Of course, there are many situations when continuing to trade will be in the best interests of creditors, so is a decision you must keep under constant review. In this respect it is important to consider your company’s ability to meet its current and future obligations before entering into any new transactions (including new finance) and ensure these obligations are regularly reviewed.
  4. Monitoring liquidity: liquidity is key and should be focused on at all times. Ensure a regular flow of up to date financial and other information to all directors, including cash flow forecasting, and discuss the same on a regular basis.
  5. Consider restructuring options: in situations where your company’s distress is not temporary, exploring the available restructuring options (having obtained professional advice) is a good way of demonstrating compliance with your duties.
  6. Consider individual companies within the group: you need to consider the individual companies within a group context and the duties you owe to the creditors of each company when making a decision. Also review your group’s existing intra-group arrangements, as the risk of insolvency may restrict your ability to borrow or make available intra-group funding or enter into intra-group transactions.
  7. Consider key contracts: while monitoring key contracts (including finance arrangements) will be the company’s obligation, you should review relevant provisions (like financial covenants and termination events) in order to develop the best course of action.
  8. Consider transactions: consider your company’s ability to meet its current and future obligations before entering into any new transactions (including new finance) and ensure these obligations are regularly reviewed. This includes any proposed payment of dividends.
  9. Ensure proper records are kept and timely reporting: ensure your company’s books and records are being properly kept up to date, regular financial and operational reporting, timely escalation of issues, and strict compliance with accounts publication rules.
  10. Think carefully before resigning: resignation will not discharge your responsibility for any previous conduct. Remaining on the board to drive a successful resolution may be the most effective means of mitigating risk.

Further infomation

For more briefings on the legal implications of coronavirus, see our coronavirus page listed under Insights: www.cliffordchance.com.

About the author:
Ilse van Gasteren is Partner in the Amsterdam Financial Markets Group and specialises in restructurings & insolvencies. She acts for financial institutions, investors and also borrowers on complex local and cross-border restructurings.