Shortages in production factors
The coronavirus outbreak could lead to exceptional shortages in production factors, some of which may be anticipated, for example:
- Raw materials and semi-finished products: It is important to secure the supply of such products, to the extent possible. It may be useful to keep larger stocks on hand than usual; alternative supply channels may also be considered.
- Purchased services: It is important to think about how best to ensure the continuity of essential services.
- Personnel: Substantial staff shortages could cause hitches in the production process. Therefore, it could be advisable to duplicate crucial functions and ensure that staff are sufficiently familiar with the tasks and responsibilities of their co-workers to perform them, should the need arise.
- Management: Companies with a somewhat complex production process may wish to consider appointing an officer to identify and anticipate potential problems the coronavirus outbreak could cause.
Financial difficulties: contact your bank
The coronavirus outbreak could of course lead to a drop in turnover, which in turn could cause financial difficulties. In many cases, it will be wise to contact the bank in a timely manner. Naturally, from a macroeconomic point of view, banks have an interest in giving breathing room to companies that are experiencing difficulties due to the coronavirus outbreak, especially if they are otherwise in good shape.
If a business has a larger pool of creditors it is temporarily unable to pay, it may be wise to try to reach an agreement with them. It should be noted, however, that an out-of-court settlement obliging creditors to suspend their claims will only be honoured by a court in very exceptional cases. The idea is that such an arrangement should only be available in the event of receivership or bankruptcy. As discussed below, however, insolvency proceedings are not quite suitable for the present situation.
A capital injection or takeover may also be considered.
There are two types of insolvency proceedings: receivership and bankruptcy.
- Receivership results in a suspension of payments. However, apart from a short cooling-off period, a suspension of payments does not extend to preferential debts, such as wages and taxes, or secured debts and is therefore rarely effective.
- Bankruptcy can be used to make a fresh start or for liquidation. Usually, however, bankruptcy leads to the destruction of a great deal of capital and therefore will rarely be suitable for solving problems resulting from the coronavirus outbreak. It is too much of a blunt instrument.
The coronavirus outbreak could lead to opportunities to take over other companies. It could therefore be useful to monitor the market closely in order to gain a picture of the recovery possibilities of potential acquisitions and the synergies that could be achieved. In this context, takeovers through bankruptcy should also be considered.
Would you like to stay up to date of our publications regarding COVID-19? Register here. We will send you a weekly update with the latest publications.