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PrimeGlobal member firm JOINSON&SPICE discusses considerations board members of tech sector scale-ups should look at because of Covid-19.

When liquidity problems strike, there are several tools at your disposal. Even if your current liquidity is good, we advice you to use a detailed forecasting process. In this forecasting process, you may include one or more of the fallowing funding methods:

Postponement of Tax Payments

A quick win is the deferral of Belastingdienst payments. If eligible, this method will provide additional liquidity for up to three months by postponing tax payments. 

For tech companies that are not profitable for corporations' tax (Vpb), the largest liquidity impact will need to come from Btw (Dutch local sales tax) and/or Salary taxes. However, this method will only provide short term liquidity. While this may help you through the first stage of the crisis, we expect that there are effects that will persist longer than this period. This requires a more structural approach.

Refinancing and renegotiating

Refinancing may offer the most long-term stability. In this scenario, keep track of debt covenants. It is not always possible to issue additional debt. Under the circumstances, current investors may be willing to extend and/or renegotiate. But keep in mind the signal this may send.

Even without attracting new capital, keep track of debt covenants. Unforeseen circumstances such as the Corona outbreak may result in crossing critical thresholds. In this situation, it is essential that the directors are prudent and keep track of the legal consequences of the covenants and other finance arrangements. During the audits of 2019 and 2020, auditors will pay attention to this crucial topic as well.

Impact on the annual report

How does the Covid-19 outbreak impact the annual report of the  previous financial year?

Even if your financial year ended before the Corona outbreak (i.e. on the 31th of december 2019), there might be impact on the annual report. There are three primary reasons why the Covid-19 outbreak may need to be reflected in the accounts:

Directors Report: the directors' report ("bestuursverslag") is the proper place  for the board to reflect on future expectations and identified risks. This is required by Dutch law (BW2 title g). In most cases, it is required to discuss the (expected) impact of Covid-19 on expectations and forward­ looking measures, as well as measures taken to limit the impact.

Going concern assumption: generally, the annual report is compiled unther the going concern assumption. A major loss  in revenue may endanger this assumption. We advice clients to gather additional evidence, as discussed on the next slide in more detail (under Directors' responsibilities).

Post balance sheet events: even though the financial year has ended, major post balance sheet events may need to be disclosed. For tech companies, this mostly relates to forward-looking balance items including the (valuation of) Deferred Tax Assets and Intangible Fixed Assets.

The NBA (the Dutch assoc1at10n for auditors) is providing additional guidance for auditors and is refreshing the guidance based upon new developments.

We use our own expertise and input from the NBA to deal with these uncommon circumstances.

What you should do:

  • Please consult your accountant or auditor: together we can discuss how you can prepare for the annual audit.
  • Keep track of scenario analyses of future scenario's, including a realistic worst­ case scenario.
  • Include the impact of Covid-19 in the Directors Report.

Director’s liability and responsibilities

As the outlook for 2020 is worsening, and global risks are increasing, there might be additional responsibilities you should assume as the director of the company. We identify several topics to help you keep track. Failing to meet certain requirements may result in directors' liability, for example in case of bankruptcy.

As director, it is your responsibility to assess whether it is possible to execute on a shareholders resolution to payout dividends. This is especially important in times of increased volatility and increased risk of bankruptcy. If you deem a dividend payout possible, be sure to save documentation substantiating this view. This is required by law.

It is the responsibility of the board  of directors (and of the supervisory  board, if is in place) to compile the annual report according to Dutch law.   This  includes communicating about the going concern assumption, as well as a discussion of the outlook for the future.

For budgeting and forecasting purposes, we advise clients to use a scenario-based model based on operational data and testable assumptions. Be sure to save these models with the financial administration as this information (including historical versions) tends to be beneficial when applying for funding, during the annual audit and even in bankruptcy procedures.

We advise directors to communicate openly and frequently with their statutory board, investors/shareholders and financial auditors. Remember that you are required by law to communicate significant matters fully and transparently with your independent auditors.

Worst case scenario – Bankruptcy

Over the past days we have discussed filing for bankruptcy with some of our clients. We know and  understand  that this scenario is suddenly more likely and may even sound like a solution  to  a highly leveraged firm in distress. Note however that there are major risks and consequences related to filing for bankruptcy. Never do so without consulting proper expertise.

First and foremost, bankruptcy means giving up control. Even in a 'pre-pack', directors may in some cases be held liable for losses of investors, while the continuity of the company will be threatened in new ways, including loss of reputation, loss of key stakeholders and loss of key employees.

We  advise directors to maintain the highest level of transparency when bankruptcy is  becoming more likely: when the curator takes over control, any undisclosed transaction will be considered from a different perspective. This is especially true for significant transactions such as the sale of tangible assets and significant bank payments.

Focus on debt covenants: when certain thresholds are reached, loans may become fully due and payable, and/or pledged assets may transfer in ownership. The timing and order of payments can be crucial.

In short: always consult your external auditors and/or  advisors when bankruptcy risk is rising.

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JOINSON&SPICE

JOINSON&SPICE is a young accountancy firm, specialising in Technology, Media and Telecom. Our team varies from young post-graduates to experienced chartered accountants (in Dutch: RA) and accounting consultants (AA). The thing that brings us together: a passion for technology companies. With years of knowledge and experience stemming from a genuine interest in our specialities, we enjoy connecting with our customers and aiding in the growth of their companies. We believe in an equal partnership where sharing knowledge is paramount. Within the sub-sector of Technology we help data centres, hosting providers, software providers, system integrators, cloud providers and online retailers with important decisions.

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