Businesslive Middle-East spoke to Mamoon Khan…

Q&A session on Contingency Planning

Contingency planning is a vital part of any organisation/business. It becomes even more important during times of crisis. How can one create a pragmatic contingency plan that covers all possible scenarios?

“I’ve got some practical suggestions based on the legal framework we have that we have in the UAE. In these difficult times, businesses have to look re-planning their existing businesses. I think the preservation of cash is extremely important as is avoiding capital expenditure unless it is essential. They should also focus on collections and stretching out their payables. Basically, this means developing a liquidity strategy for the immediate future.

I also think they should focus on risk analysis in terms of the existing business and, most importantly, how to live with creditors.

“Once you assess the financial health and the expectation of future cash flow and a mechanism to preserve cash, it is very important during that stage, through your corporate governance process to your internal processes, to begin interacting with your creditors, including banks and financial institutions, which perhaps in a certain instance are your significant or substantial creditors.

I think the first point, strictly for UAE borrowers, is to assess whether such creditors are still part of the test guidelines. They need to check if their banks have availed the stimulus package provided by the central bank and if yes then what sort of relief can be obtained from these banks. This provides them with a vacuum period to be able to stretch out their laundry payments, interest repayments, and other unfunded facilities, and get some relief.

“When dealing with banks, and this is a very important point, make sure that you deal with the relationship managers or any restructuring office in the bank, who will be more sympathetic to your cause. Avoid dealing with remedial offices in banks because these offices have a bottom line and are usually very trigger-happy in initiating litigation against debtors.

“If you have multiple creditors of banks, then perhaps consider dealing with them collectively as opposed to individually, in order for the stronger creditor in that group to control the smaller lenders. We have always seen that to be very helpful. If you have a stronger bank, which is willing to support you, it will bring in line some of the smaller creditors.

“And if you are dealing with them collectively, perhaps when you are in dire distress but you have still an expectation to provide the business, then consider discussing an informal – standstill agreement – which essentially imposes a moral obligation on these creditors not to take action whilst the restructuring negotiations are taking place. You could also look at appointing a creditor committee with a lead a bank to help you steer through the restructuring process.

“Another very important thing is to deal with all the creditors equally and be transparent with them, because eventually if you do go into bankruptcy that is a penalty that can be imposed on you if you were found to be dealing preferentially with one creditor over the other.

“However, you could be in a situation where you may have to prefer one creditor over the other given your current financial condition. As an example, you could perhaps prefer your raw material supplier or any other counterparty, providing services that are extremely critical to the preservation of the business.

“You may have in your group of creditors, certain secured creditors, who hold a preferential debt. For example, a mortgage or a pledge over your assets. These could rank a little lower in your priority because you know that they have secured assets and they’d be more willing to be, forthcoming, given that they already have certain rights over your assets.

“Lastly, for any potential restructuring, it would definitely benefit you appointing a skilled financial advisor to help you steer through these troubled waters. A financial advisor can essentially help you assess the current nature of your business and your expectation of cashflow. They also are very experienced in dealing with creditors. Financial advisors can definitely come in handy when you’re dealing with multiple creditors.”

What potential risks, liabilities, and obligations should the management or top tier keep in mind when creating contingency plans? How best can one mitigate the risks and liabilities?

“In order to respond to this particular question, we need to understand who the management is in a corporate entity. From the UAE perspective, the manager or management is not very clearly defined in the bankruptcy law. They have either deliberately or inadvertently vague.

“The bankruptcy law defines management as any person, who can exert influence over the decision making of the company and they’ve left it at that. This under, common law jurisdiction, is called shadow directors. You may have a manager appointed or directors appointed under the constitution documents, but then you have other people in the management, who are not formally part of your corporate documents, in form of a CEO or CFO or a COO. They may also be liable because they are exerting certain influence in the decision making of the company. So, it is very important to understand who the manager is.

“In terms of the awareness of liabilities, I think any manager who is in control of the decision making during the first trigger – filing for preventive composition – should be aware of not taking any unnecessary risks, which would render them liable.

“The management or the manager at that stage should consider the following actions, which can potentially hold them liable. Sale of any assets of the company undervalue, and disposal of assets, which has no benefit to the company, hiding of assets, concealing of information, removing of assets from the jurisdiction, can all increase their liability and one needs to be careful when dealing with creditors. If you’re preferring one creditor over the other or you’re managing your creditors in a way that it harms the general body of creditors, it can affect you adversely in bankruptcy court when looking at management liabilities.

“While there is no liability or penalty for not filing for bankruptcy, the bankruptcy law does provide for various penalties which range from prison terms up to a maximum of $1 million in fines if management is found to have taken actions that harm the interest of the company.

“Strict liability is where the bankruptcy law imposes a payment obligation on the manager or a director without any exceptions if it is determined that such manager or director is responsible for the company’s losses (where the company’s assets are not sufficient to pay 20 per cent of the company’s debt)

“In terms of mitigation, the law uses the term called necessary precautions without really defining it. So, when taking any actions in that particular period the management should be taking necessary precautions when taking any decisions, which in our view essentially translates to being very transparent with all their dealings and this comes down corporate governance within the company. Essentially you should take minutes of all your decisions and documenting them for all future evidentiary purposes.”

“It helps to keep all the paper trail, keeping the chain of correspondence with the shareholders, making them aware of the financial condition of the company and the actions being taken, seeking their consent where required. It is important to be pushing decisions upwards to the shareholders and if the senior management is not comfortable then escalating it to shareholders for them to take the decision.

“Lastly, the most important point is preparing and maintaining sufficient evidence on record of all the key decisions that were taken by the management in an effort to minimise the losses of the company.”

How does one ensure the legal language and the tone of corporate authorisations take into account the circumstances of financial distress?

“This is very important, even from a non-financial aspect as well. In our experience, we see a very skeletal form of corporate authorisations in the form of a two-or-three liner corporate resolution. I think the most important thing is to be more descriptive in your resolutions. This will reflect on the good corporate governance of your company. The first point is to take minutes of all resolutions from directors, shareholders and managers. Particularly in times of financial distress, even the communication between the managers and the shareholders needs to be reflected through proper correspondence, which is duly certified. It is also important to duly certify the corporate authorisations with signatures of the keepers, key directors, and perhaps directors and partners, which gives them more credence to that resolution. It is also good practice to ensure that the resolution reflects the circumstances under which the decisions were taken in order to minimise losses and in the best interest of the company.
“Lastly, all corporate authorisations need to be recorded and produced, so that they are available at every stage when it is required.”