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The UK is now in its first recession in more than fifteen years. Many businesspeople have not previously had to cope with the practical implications of an economic downturn.

This short guide is a checklist of important legal issues to consider and things you should think twice (at least) about before doing. It is not comprehensive. We hope you find it useful and would be happy to advise you on any of the points listed below or any other legal issue you may have. We strongly recommend that before taking any action that has legal implications, you take professional advice.

Priority Review Items

1. Contracts and Terms of Trade
The terms of trade under which you make supplies should be reviewed as a matter of priority. In particular, if your terms of trade do not include a reservation of title clause (which means goods supplied by you remain yours until paid for), you should consider amending them. As always, look carefully at any new contracts you are asked to sign.

2. New Account Applications
When times are hard, new credit account applications should be looked at particularly carefully and the credit risk assessed. A large account can represent a very significant financial risk.

3. Redundancy and Contracts of Employment
Laying off employees is never easy. Redundancy presents a major risk to a business if not managed correctly and there is a significant danger of claims being brought by disgruntled ex-employees for unfair dismissal. Where such a claim includes a breach of the anti-discrimination legislation, the penalty can be unlimited, so take care when selecting staff to be made redundant.

Where 20 or more employees are being made redundant at one establishment within a period of 90 days, employers have a statutory duty to carry out meaningful consultation with the appropriate representatives of affected employees, for a specified period, and to notify the Secretary of State before any employees are given redundancy notices. Failure to do so can lead to a protective award requiring the employer to pay each affected employee 90 days’ pay. Where the redundancies are the result of a business closing, the statutory duty to consult extends to the reasons for the closure. Collective consultation does not replace the need to consult with individuals who may be made redundant in order for any subsequent dismissal to be fair. Always take advice before you take any action.

The statutory redundancy scheme is based on age and length of service but is exempted, by the Employment Equality (Age) Regulations 2006, from being discriminatory. However, an employer’s own enhanced redundancy pay scheme is only exempt if it mirrors the statutory scheme, applying the same multiplier to all aspects of it or if it can be objectively justified as a ‘proportionate means of achieving a legitimate aim’. Employers with an enhanced contractual redundancy pay scheme are advised to review it to make sure it complies with the rules.

Dismissed employees may decide to set up in competition with you, making use of the knowledge and skills learned whilst in your employ. A properly-worded non-competition clause may offer some protection. Review your contracts of employment carefully.

4. Security and Anti-Fraud Countermeasures
Employee crime was already booming before the economy went into recession and is expected to increase further as the recession progresses. Take extra care to ensure your internal and external security measures are robust and, in particular, that you are alert to the possibilities of fraud by a highly-trusted employee and theft of data.

5. Directors’ Liabilities
The Companies Act 2006 imposes significant duties on directors with regard to employees, shareholders and other ‘stakeholders’ in the business. Breach of duty can lead to personal liability for a director. See http://www.opsi.gov.uk/ACTS/acts2006/ukpga_20060046_en_13#pt10-ch2.
Whether you are a director or non-executive director, you should fully understand your rights and responsibilities.

6. Financial Liabilities
If you use overdraft facilities, factoring, have a debenture or you have a loan agreement that will need to be renegotiated, review the documentation as soon as possible. Lenders are increasingly seeking to restrict their lending risk and are routinely asking for additional security for the advances they make.

7. Cash Protection
If your business has significant cash balances, you should be aware that the £50,000 ‘protection limit’ applies to each banking group registered under a single Financial Services authorisation. If you are self-employed, the limit will include both business and private money, so if the total exceeds £50,000, you may be at risk. The Government guarantee does not include banks in the Channel Islands or the Isle of Man.

8. Debt Management
Management of debt has always been a key issue in good cash-flow management. An effective system for policing debtors is essential. In particular, watch out for customers whose payments start to ‘slide’ – for example, a customer who stops taking early settlement discounts could well be in financial difficulty. Make sure your bad debt risk is minimised.

9. Property Issues
Whether landlord or tenant, it may be time to re-read your lease. If a break point is approaching, it could be time for a move to new premises or a renegotiation of terms. Many issues can arise on a change of premises (for example, employment law issues), so taking advice before acting is crucial.

10. Partnerships
In an unlimited partnership, the partners are jointly and severally responsible for the partnership debts. If you haven’t previously taken an active interest in the finances of your partnership or taken advice on your partnership agreement, now is probably the time to do so.

Watch Out!
Your actions to solve a problem in one area – for example, making alterations to your firm’s pension scheme or suspending payments into it whilst cash is tight – may give rise to other difficulties, so taking advice before acting is essential.

Lastly, do read your commercial insurance policies carefully and if you have any doubts whatsoever about any of the wording, contact us for advice. A growing number of disputes are reaching the courts where the argument turns on the exact meaning of a term in an insurance policy.

Working together, we hope to do our part to help ensure that the major risks posed to you by the recession are avoided. However, if problems do arise, the best approach is to contact us as soon as possible.