Ramūnas Kontrauskas, a partner at the Marger Law Firm, provides five essential tips for businesses that will help them recover more quickly after stagnation brought about by the lockdown.
1. Amendment of contracts
It is easy to destroy but difficult to create. This wise perception sounds true when talking about contracts. As the case law shows a crisis or other conditions that affect the performance of a contract are not always a reason to change the contract. However, the COVID-19 pandemic may necessitate the amendment of a contract.
Such an amendment is consistent with the principle of maintaining a contractual relationship. However, the case law does not approve of the unilateral termination of a contract, saying that it is a measure of last resort. The case law requires the parties to cooperate and collaborate. A manager, seeing that their company is experiencing difficulties in performing the contracts, is forced to initiate the amendment of the contracts. What action should the manager take?
When, after the conclusion of a contract, the circumstances related to the performance of the contract change, one of the parties to the contract has the right to apply to the other party with a request to amend the contract. It is important that such a request is substantiated. A request to amend the contract does not in itself grant the right to suspend the performance of the contract. Only if it is impossible to agree on the amendment of the contract within a reasonable time, there should be a possibility to apply to court. In the course of such a dispute, the court may either terminate the contract and set the date and conditions for its termination, or amend the terms and conditions of the contract to restore the balance of the contractual obligations of the parties.
Should a decision to initiate the amendment of the contract is taken, it is vital to know that the restriction of the performance of the contract must be substantial and genuinely infringing the interests of the party as a request to perform the contract in such circumstances would contradict the principles of good faith, reasonableness, and justice. What is necessary is a fundamental imbalance in contractual obligations. It is determined by taking into account a substantially increased performance-price or a significant decrease in the performance value.
Conversely, even there is a fundamental imbalance in contractual obligations, currently, it is really crucial to invite the other party to negotiate and review the terms and conditions of the contract. Speaking about the last financial crisis, business solidarity was observed during the lockdown in our country, which can help to find a compromise solution acceptable to both parties.
2. Resorting to financial support
The declaration of quarantine has generated much debate at the political level on what financial support measures should be applied to business. The first subsidies for downtime or partial downtime have already been allocated to entrepreneurs. If a manager is convinced that the business support mechanism is working, they should use these measures. The Ministry of Economy and Innovation has announced that, together with INVEGA, it is already applying the following measures:
- soft loans (from 0.1% to 0.19%) if COVID-19 has reduced the company's turnover by more than 60%;
- the interest on the loan or financial lease agreement will be financed at 100% if an agreement on deferral of repayment of financial liabilities is concluded with the financial institution;
- the payment of invoices issued from 16 January 2020 to 16 March 2020 to supplier companies if the purchasing company is no longer able to pay the invoices and is included in the list of STI (State Tax Inspectorate) taxpayers affected by the quarantine;
- the issuance of a guarantee covering 80% of loans of financial institutions or leasing transactions.
The list of support measures should be enlarged. For example, the initiative of the Ministry of Economy and Innovation, endorsed by the Government, is intended to subsidize up to 50% rent to a business if the property manager grants at least a 30% discount to the tenant. Regarding the financial support measures, it is very important to submit applications in time. To help a business to overcome difficulties, STI and SODRA (State Social Insurance Fund Board) may cease collecting taxes and accruing interest on arrears and initiate interest-free tax loans – these measures are also definitely helping businesses dealing within difficulties. Therefore, managers should be very active and show interest in support measures offered to them by the state.
3. Dialogue with employees: talking clearly about working conditions
The employees of a company are the greatest asset as they help to create the value of the company. Even before the occurrence of COVID-19, many businesses in different sectors had experienced the problem of staff shortage. It's no surprise that the vast majority of companies have to reduce costs as a result of COVID-19, and wages often make up a large share of a company's expenses.
COVID-19 has brought about a lot of uncertainty; therefore, not only direct team leaders but also the company manager has to communicate with employees. This is necessary to ensure not only the quality of the work performed by the employees but also the possibility to agree with the employees on the change of working conditions. The unemployment rate in Lithuania is already above 10%; the labour supply is limited; therefore, it is likely that employees will be more supportive.
The termination of an employment contract at the initiative of the employer without the fault of the employee is a decision that may come at a price for a company due to the mandatory severance pay. Sending employees on leave or applying downtime are temporary solutions. Therefore, already now that the Government is starting to ease lockdown rules and more and more businesses are opening their doors, the manager should start a dialogue with employees and discuss what working conditions the company will be able to ensure after the end of the lockdown. This will allow the manager to plan costs and company operations and give employees more security about the future.
Remuneration must be agreed in each employment contract. The terms of remuneration are regulated quite flexibly: the amount of the employee's salary and its components, amounts, and indicators are a matter of agreement between the parties to the employment contract. Alternatively, companies with an average number of employees of 20 or more must have approved pay systems that should be accessible to employees. The information must be provided, and consultations must be arranged before the change of the pay system is supported.
To react to market changes in time and manage risks, the manager should review the remuneration system already now. It is necessary to adopt such a remuneration system that would not only respond quickly and flexibly to market changes but also help to retain existing employees and keep them motivated.
4. Key information must be gathered before making transactions
The general assumption is that the actions of the head of a company are not considered illegal – if the conclusion of a certain transaction did not exceed the normal economic and commercial risks, the manager acted honestly and with care.
We suppose that these concepts are quite abstract. What should a manager take into account before concluding transactions?
Control questions that the manager should answer before concluding transactions:
- whether all the necessary information has been collected or carefully examined;
- whether the transaction is economically beneficial, what economic benefits the conclusion of such a transaction will bring to the company and whether its conclusion will not involve excessive risk, taking into account the company's financial situation and creditors' interests (assessment of expected benefits and potential damage and probability of occurrence);
- whether there is no ultra vires – misuse of powers, or conflict of interest;
- whether other management bodies (board and/or supervisory board) and shareholder(s) are informed about the situation and decisions made;
- whether previously concluded transactions (especially agreements with banks) do not prohibit the conclusion of such transactions, or whether there is no obligation to notify creditors about their conclusion.
To protect against civil liability, the manager is advised to keep records (for example, minutes of meetings, e-mails, information gathered, consultations with professional advisers) that would confirm that the control questions have been answered prior to the transaction.
5. Careful assessment of the priority of settlements and the interests of creditors
COVID-19 has caused a decline in revenue for most businesses, while their costs actually remained unaffected. With falling income and cash flow disrupted, it becomes hardly possible to make payments.
The Civil Code provides for the priority of settlements when the company does not have sufficient funds to meet all the claims and gives creditors the right to dispute transactions concluded by the debtor that violates their rights. The priority of payments is mandatory. If the priority of settlements is violated, an advantage granted to one creditor, by reducing the ability of the remaining creditors to receive payments, leads to a risk that such a payment will be declared invalid at the initiative of one of the creditors. As a last resort, when the priority of settlements is violated, there is a risk even of the intentional bankruptcy of the company, which may also constitute the personal responsibility of the manager.
To avoid possible disputes with creditors, it is advisable to follow the rule established in case law: it is allowed to conclude a typical transaction that satisfies the claim of one of the creditors, even though the due dates of payments for other creditors have passed, even in case of default to other creditors. There must be grounds to assume that the standard of reasonable conduct of a person has been complied with and a good-faith effort has been made to seek benefit to the company and make a settlement with all creditors in accordance with the law.
Thus, if a company makes settlements with creditors within the time limits laid down in the contracts concluded with them and did this by observing settlements priority, such settlement with one of the creditors cannot typically be regarded as giving it priority over other creditors. Consequently, adherence to fair business logic and settlement priority is appropriate prevention of disputes.
Translated by Metropolio vertimai – your trusted translation partner
