Given the current economic climate and issues arising due to Coronavirus, I thought it would be useful to give an overview of the kind of protection all business owners should have in place.
I am not going to focus on the various reliefs and assistance being offered by the Government in light of the current crisis but discuss more generally some of the legal considerations around disaster planning.
- What happens if a business owner is incapacitated
As a starting point, let’s look at what happens in the event that a business owner is unable to attend to the affairs of a business due to ill-health or injury. The first point to consider is whether there are multiple business owners and how the business is set up.
There are practical and operational issues as well as legal matters to consider. For instance, who has access to the business bank account? If only the business owner has access then there will be significant issues around paying suppliers and employees.
The best advice would be for all business owners to ensure that they have an appropriate Lasting Power of Attorney for their chosen attorney to have the power to deal with business affairs in the event that the business owner is incapacitated. Without a Power of Attorney, it may be necessary to apply to the Court of Protection which is an expensive and lengthy process.
From a practical perspective, key business information such as supplier contracts and operation manuals should be centrally stored and accessible to key staff.
Where there are multiple business owners, you also need to consider whether it is appropriate to have contractual provisions in place to document how business profits will be shared if one owner is unable to work. For instance, in a partnership agreement it is possible to provide express provisions for a reduction in profit share if a partner is incapacitated for a certain period.
- What happens if a business owner dies
Again, the overriding structure of the business is key. If a business owner was a shareholder, then the starting point is that the shares will pass into the business owner’s estate. This could be a spouse, parent, child or some other relative.
Where the deceased is the sole Director and Shareholder, one of the practical issues we have seen is that the Company cannot certain actions without the authorisation of a Director. If the only Director is deceased, this can lead to a number of problems, for instance in respect of a bank account or even entering into certain contracts.
Further the process of appointing a new Director may not be straight forward depending on what is detailed in the Company’s Articles of Association.
Where possible, it is often desirable to have at least 2 Directors even if the shares are solely owned by one person.
Even where there are multiple owners, it is often undesirable for the shares to fall into the deceased’s estate as ordinarily the preference would be for the other shareholders to purchase the shares at market value. Unless appropriate provisions are in place however an estate may refuse to sell the shares and even if the estate wanted to sell the shares, the remaining shareholders may not want to buy the shares or may not have the funds to buy the shares.
An easy solution to put in place would be a cross option agreement which controls the transfer of shares in the event of the death of a shareholder and is normally supported by insurance which will pay the market value of the shares.
- ‘Full Proof’ Contracts
Contracts need to be carefully thought through to ensure that they cover all eventualities. This will include, for instance, limitations of liability for breach or where a party is unable to fulfil their obligations under a contract.
In commercial contracts, there is very little statutory protection so it is important that contracts clearly explain what happens, for instance, in respect of deposit payments, when payments are due, what happens if there is a breach of contract and what constitutes a ‘Force Majeure’.
It is therefore imperative that a company has contracts which suit the needs of their particular business and the issues which can arise.
- Understanding ‘Force Majeure’
A ‘Force Majeure’ event, generally, is an event which prevents one party or another from fulfilling their obligations under a contract. The outbreak of Covid-19 is likely to result in various allegations as to the extent to which the Force Majeure clauses in applicable contracts include a pandemic such as Covid-19.
There is no statutory definition and it is down the terms of the individual contract. The issue doesn’t just relate however to whether an event is or is not a Force Majeure event but it is also important to understand what the contract states happens if a Force Majeure event arises.
- ‘Lay Off’ Clauses in Employment Contracts
Many employment contracts, particularly standard versions, do not include ‘Lay Off’ clauses as they are rarely used but the recent outbreak of Covid-19 highlights the potential importance of such clauses.
A ‘lay-off’ clause allows an employer to temporarily lay off staff in the event of temporary changes in the availability of work, for instance the sudden downturn of work. A ‘lay-off’ clause will allow an employer to ‘lay-off’ employees without pay on a short term basis. The Covid-19 outbreak is a prime example of where such a clause could have been relied on as an alternative to redundancies or dismissals.
You can only rely on a lay-off clause if there is an express lay-off provision in the employment contract. If such a provision exists, this will allow employers to temporarily lay-off staff without pay (subject to certain conditions).
Summary
Current events will continue to prove challenging for many businesses. I am confident that the economy will recover but the current circumstances further highlight the important of ensuring that businesses of all sizes are prepared for the unexpected.
What we can say with certainty is that failing to prepare for disasters will ultimately cost businesses more time and money in the event that a disaster occurs.
We are here to advise and support businesses during this difficult time but also to prepare for the future.
One of our expert lawyers will be more than happy to discuss disaster planning within your business and help you, not just through this crisis, but also to future proof your business going forward.
Please contact richard.coulthard@isonharrison.co.uk for more information or call 0113 284 5000 today.
