Given the recent decline in financial performance, the business is now in breach of its covenants with the bank. Should we be concerned?
That will depend on the terms of your facility and the stance taken by your bank.
Banking facilities often place obligations on businesses to stick to certain financial criteria. For example, an obligation to keep turnover or profit above certain levels or a commitment to keep the bank’s exposure within an agreed percentage of the value of the company’s assets (known as loan to value ratio).
The consequences of breaching those covenants will depend on the terms of your facility, but normally this amounts to an event of default. Events of default can result in the loan (or whatever form the facility takes) becoming repayable and could give the bank certain powers to take action to recover the money that they are owed.
Whether the bank will take action during these unprecedented times is another matter, particularly given the extent of support being offered to businesses via mainstream lenders and the political desire to keep viable businesses up and running. Lenders themselves will no doubt wish to remain supportive where possible. The underlying performance of the business (and whether but for the effects of Covid-19 it would have been in a healthy financial position), the relationship you have with the bank and your history with them will no doubt be relevant to the approach taken by the bank. However, early engagement with your bank (as well as other key stakeholders in the business) will be important.
Related FAQs
The key factors for determining status for employment and tax purposes are generally the same. However there are some cases that highlight the different approaches taken by employment tribunals and HMRC when determining status. The important thing to consider for IR35 purposes is that being deemed employed for tax purposes does not mean a contractor is ’employed’. PSC’s can still be used in moving forward but there are likely to be discussions on the commercial aspects of the contractor arrangement. Employment status for tax purposes is likely to come at a cost for both parties.
As long as you can demonstrate that you have exercised reasonable care in determining status you have discharged your obligations in that respect. However, if you are unable to demonstrate this, you may as the end user client be responsible for the contractor’s tax and NIC’s.
Remote mediations have become increasingly popular as a way of settling a dispute before it goes to court. There are a number of ways in which you can mediate remotely, but the most common platform is Zoom, due to its easy-to-use nature and the ability to have ‘break-out rooms’. We have answered some FAQs and set out a quick guide to remote mediations below.
What is remote mediation?
- Mediation is a form of assisted negotiation, in which a neutral 3rd party mediator seeks to help the parties resolve their dispute. The process on the day is managed by the mediator and adopts certain key ground-rules. These are that discussions are private and cannot be referred to in court; and the process is entirely voluntary and non-binding, if and until a settlement is finalised. In the current pandemic mediations are now usually conducted remotely by video conference, instead of an in-person meeting.
- The structure of the mediation will depend on the matters that are in dispute. Before the mediation the parties will exchange their views in position papers and prepare a bundle of the key documents.
- Generally the parties will start the mediation in the same ‘room’ as the mediator, where they will be invited to set out their positions. The mediator will then put the parties into ‘break-out rooms’. These rooms serve as your own private ‘room’ which the mediator will join. You will therefore be able to have private discussions with the mediator without the other side being able to hear those discussions. The mediator will go between the ‘break-out rooms’ to discuss a party’s position further in order to attempt to reach a settlement.
- If an agreement is reached, at the end of the mediation the Settlement Agreement will be drafted. The Settlement Agreement works as an enforceable contract. The Settlement Agreement will outline the details of what has been agreed and the intentions of the parties, such as any actions required, payments to be made and appropriate timescales. Each party will sign the Settlement Agreement, which can be done electronically.
- It is not always possible to reach a resolution/agreement by mediation, but the mediator serves as an impartial third party in order to aid the process. If no agreement has been reached, the mediation may still prove useful as it will give you a better understanding of the other side’s position.
What should I do before the mediation to prepare?
- Ensure that you are in an area with minimal distractions. Mediation is a confidential process, so make sure that you are in a private location.
- Ensure that your microphone and camera work and that you have access to the online platform that will be used. We send our clients a link to the website in advance so that this can be tested out.
- Consider any agreed dress code and dress appropriately.
- Have a copy of the mediation bundle to hand, whether in hard or soft copy, and be aware of what documents are in there.
Any tips on what to do on the day?
- Remember to make sure that before you have any private conversations with the mediator you are in your break-out room.
- You may contact the mediator whilst being in the break-out room. On Zoom there is an ‘Ask for Help’ button on the screen. The mediator will then be prompted to join your room.
- Ensure that you inform the mediator if you or others enter/leave the room. It is important that the mediator knows who is present.
- Be mindful of body language and facial expressions as these can appear more enhanced on the screen, and they are easier to pick up in a remote mediation.
- Stay calm and focussed at all times. When you have a dispute it is sometimes tricky to maintain a calm manner, but this is always vital in attempting to reach an agreement.
- When engaging with the mediator avoid any external distractions such as text messages and emails, as it may come across that you are not interested in the process. It is important to pay attention so that you do not miss any dialogue which may be key to any agreement that is reached.
- When you are in the break-out room without the mediator make sure that you take breaks and keep refreshed, as virtual mediations can be tiring.
It is possible to review working arrangements for contractors before the new rules come into effect. This will require immediate action.
You could consider terminating current contracts and entering into new terms that reflect working arrangements for a self-employment arrangement.
Another possibility is encouraging contractors to abandon the PSC model and provide services under a compliant umbrella company.
In the event of a determination of employed status you should seek to enter new terms that at the very least reflect the new tax arrangements .
It really depends on what your measure of success is! We would suggest regular wellbeing surveys – if the results of wellbeing surveys suggest that the culture is becoming more open, more psychologically safe, if people are asking for help or referring colleagues to MHFAs as a safe and effective pair of hands – these would be strong indicators of success.