COVID-19 and government responses to the growing pandemic are creating unprecedented and rapidly evolving challenges. In the coming days, businesses will need to adapt quickly to the shifting economic and regulatory landscape.
Here is checklist of considerations that business leaders should take into account as they grapple with the impacts of the pandemic:
- Understand your responsibilities to your stakeholders, including the fiduciary duties of your officers and directors. Directors and officers do not have an obligation under Canadian law to inform creditors of the company's financial distress. Their duty remains to act in the best interest of the company; but in the zone of insolvency, the interests of creditors of the company become more important. Various federal and provincial laws provide that directors may be liable for the failure of a corporation to pay certain obligations including:
- Income tax, employment insurance premiums and Canada Pension Plan premiums from payments such as wages or benefits.
- Goods and Services Tax (GST) or Harmonized Sales Tax (HST).
- Federally, directors may be liable for 6 months' unpaid wages to employees (provincial legislation also imposes similar obligations).
- Liquidity. If you have a credit facility in place, are you able to draw on that facility to obtain additional funds? Do you have assets that that can be liquidated in the short-term if needed? "Cash is king" when a company is experiencing challenges.
- Key relationships. Identify your key vendors and other relationships and recognize the potential stress points in those relationships. Do you face the risk that key suppliers will cut you off because of delays in payments? Do you have alternative sources of supply if those key vendors fail?
- Employees. View your employees as part of the solution, but if you need to perform reductions in your workforce then understand all the requirements that you must satisfy as part of the process.
- Relationships with corporate affiliates. You should be careful of commingling funds of multiple entities without appropriate agreements and protections in place.
- Critical dates. What are the critical dates coming up for the company? These could include maturity dates under loan agreements, the dates when reports to lenders and other contract counterparties may be due, the dates of contract expirations or renewals, litigation deadlines, and termination dates under default notices. Can the parties negotiate extensions of critical deadlines?
The experience of our colleagues from around the world is that maintaining open lines of communication with your key stakeholders (suppliers, lenders, customers and employees) is the most important step a business can take. There is worldwide awareness that global supply chains have been disrupted and that businesses are facing unprecedented challenges. If the parties are prepared to address these issues in a good faith manner then there are creative solutions that avoid invoking force majeure or defaulting on obligations.
Our Canada: Coronavirus Resource Centre and global Coronavirus Resource Center provide information on a range of issues to help you understand, prepare and respond quickly to the significant challenges posed by COVID-19. Our restructuring and insolvency lawyers are prepared to assist businesses experiencing distress due to the pandemic.