Testing times for Directors during Coronavirus – their duties and obligationsPepperells
Many companies have unexpectedly and suddenly found themselves in difficulties financially and it is quite possible that many companies and businesses will collapse over the coming months as they struggle with the current business disruption and inability to pay suppliers etc.
Directors must remain mindful of their legal duties towards the Company and the shareholders, under current rules, so they do not expose themselves to personal liability if they get it wrong. In a relatively fast changing scenario, however, the Government may introduce changes both legal and financial which will impact upon what appears in this article:- and so Directors must make themselves aware of any such changes as they happen.
The Government has said that it will bring into law in the coming weeks changes to UK Insolvency Laws to help struggling business to stay afloat and weather the storm.
- Directors duties – generally
Directors are obliged to exercise reasonable skill and care in the management of their Company’s affairs. Generally, when a company is solvent, the Directors must act in the best interests of the Company and its shareholders. When a company becomes insolvent, however, the Directors have a duty to act primarily in the interests of the company’s creditors. There is a shift in the burden of those to whom the Directors are responsible. A company’s insolvency may either be on a cashflow basis (i.e it is unable to pay its debts as they fall due) or on a balance sheet basis (when the value of the assets is less than the amount of the liabilities, taking into account contingent and prospective liabilities). When a Company becomes insolvent is often difficult to determine. A Director should apply the test of deciding when a Company has no reasonable prospect of avoiding an insolvent liquidation.
The obligations to consider the interests of those persons who are relevant at any time apply not only to Directors in the normal sense of the word but also shadow directors and “de facto” directors.
The running of the Company is the responsibility of the full board of directors and so it is important that decisions are taken collectively, even though there is a proper distribution of work between the Directors.
- Practical steps to be taken
2.1 Given the duties of directors currently, during this crisis they should:-
- Meet regularly – daily or even several times a day to meet the fast changing situation with which we are confronted. Directors should assess the impact of continuing announcements by Government and to consider the application of the various help schemes to the Company and its business. Under their Articles of Association, most companies are permitted to hold meetings by telephone or videoconference. If needs be (and with professional help) changes can be made to Articles of Association in order to regularise this. Minutes of those meetings should still be kept to show, if necessary, the circumstances and the decision making process.
- Seek professional advice, if in doubt, as to the extent of their duties or any practical implications arising. Being seen to do so, may assist if problems later arise or proceedings follow.
- Assess and consider the latest financial position of the Company and that up to date financial information is available. Look at options to reduce expenditure, seek possible rent payment ‘holidays’, review staffing levels and working hours etc, Prioritise cash flow.
- Take into account that both Tax deferrals (of whatever form) and government loans are not gifts – they will have to be repaid at some time.
- Be realistic. Just as Directors may expect customers to pay monies owed to the Company so suppliers will expect to be paid. Recognise that neither of these things may be possible.
As far as employees are concerned Directors should consider whether they are working effectively from home where that is possible and what further support they may need in order to do that. It needs to be considered whether any staff members can be placed on furlough to take advantage of the Government’s salary cover scheme.
As to customers, it needs to be assessed whether the Company can still successfully supply goods or services remotely and if so are those customers able to pay. Relationships need to be maintained but effective credit control decision making is going to be essential.
What also needs to be considered is the position of suppliers and what problems there are to the business the Company conducts and its dependency upon such suppliers. Will the Company able to pay suppliers and/or can other terms on which a Company usually conducts its business be negotiated?
2.5 Loans and Borrowings
The current financial difficulties may put a Company in breach of financial covenants in Bank and other loan agreements and Directors need to consider what knock on effects that may have in other similar arrangements. Where ever possible a Company should speak to its lenders and major creditors – if the lender or major creditor is aware of the problem, it may be able to assist. There is nothing worse than a lender or major creditor not being told of problems.
In summary Directors need to consider:-
- the likely consequences of decisions reached (and minuted)
- the need for the Company to conduct its business correctly
- the interests of employees and relationships with suppliers, customers, banks etc.
- the need to act correctly and fairly towards shareholders and creditors dependent on the status of the Company.
- avoiding if at all possible, one group company supporting another, and shareholders guaranteeing the debts of the Company.
- avoiding at any cost “fraudulent trading” punishable by fine and/or imprisonment.
- Possible Government changes
Directors need to look out for:-
- a moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek to resolve or restructure.
- Protection of supplies to enable companies to continue trading during any moratoria
- A new restructuring plan or procedure binding creditors to that plan
The Government has already announced a temporary suspension of “wrongful trading” provisions for 3 months to be applied retrospectively from 1st March 2020 so that company directors are removed from the threat of personal liability.
All other checks and balances that are designed to ensure that Directors fulfil their duties properly will remain!
Pepperells can help you with any issues you may have or which you may require us to undertake. We can also answer any queries or concerns and advise you as to legal options available to you, as well as steps to protect your business, employees or your job. Contact us at any time by whatever means suits.