Reducing insolvency risks as COVID-19 outbreak extends

The impact of COVID-19 on supply chains and industries including tourism – coupled with recent market panic (made worse by the dispute between Russia and Saudi Arabia) – will cause ongoing disruption to the local and global economies.

Businesses should consider and plan for such impact on their key commercial relationships. This planning and risk assessment should include a review of the company’s ability to meet existing contractual obligations, including:

  • analysis of potential or actual breaches of covenants in loan and security documentation; and
  • material adverse changes clauses/force majeure clauses (most likely triggered in the event of a pandemic being declared by the World Health Organisation) in key supplier and customer contracts.

Cross defaults as a result of such breaches could also occur. Early engagement with lenders and key commercial counterparties should be adopted where actual or potential defaults are identified.

While the effect of world events is unknown, it is possible to survive and continue trading during such uncertain times. At risk businesses are encouraged to seek legal advice on the ability to terminate contractual arrangements, compliance with directors’ duties, drafting standstill arrangements and assisting in the restructuring of existing facilities.

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