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Directors’ duties and Covid-19: don’t make decisions in isolation

Gateley Legal

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All directors should be familiar with their duties under the Companies Act 2006 and other statutory provisions, and have processes and procedures in place to ensure their obligations are met.  But how are those duties impacted by the Covid-19 crisis?

Company directors need to consider carefully how risks associated with the Coronavirus impact on their duties when making decisions, often at a rapid pace and under extreme pressure.  In addition to taking care of their people in accordance with regulatory obligations under health and safety and other laws, a director’s statutory duty under section 172 Companies Act 2006 to promote the success of the company for the benefit of its members generally requires a director to consider a non-exhaustive list of matters including the consequences of any decision in the long term, the interests of the company's employees, and the need to foster business relationships with suppliers, customers and others.  This may be the result of good decision making during the current crisis, where short term measures implemented, for example, to protect the workforce, reduce costs, prioritise critical payments and delay others, may have short-term adverse effects both financially and by reputation, but be designed to promote longer-term success.  But it is perhaps more likely to be by default than design.
 
Where the impact of the crisis is felt financially directors must take note of the changing focus of their duties.  Duties are owed to creditors when directors know or should know that the company is or is likely to become insolvent, where 'likely' means probable.  The government has put a number of measures in place to mitigate the drastic effects of the ever increasing economic downturn, particularly for those businesses where the impact is severe.  However it is inevitable that some companies will fail and we have already seen Covid-19 cited as a contributor to high profile failures of Fly-Be and Laura Ashley.  Others will follow.  This means that directors must consider at all times whether their duties have switched from the company and its members to creditors, and the personal risk that brings to them in the guise of wrongful trading, misfeasance, and voidable transactions.  If and when that point is reached directors must put their creditors first and foremost and take all the prudent steps of trading in the twilight zone.  They will hope that, with strong and robust decision making now, what might become a struggling business will turn around once the public health issues have receded, and that the economy will soon pick up with a quick and robust recovery and stability returning to the markets. However these are unprecedented times and there may be long term disruption to customer bases and supply chains, resulting in a slow recovery of confidence and ‘business as usual’.

Our advice

Prudent directors should acknowledge and address the risk of insolvency at an early stage in any downturn they experience.  In addition to taking appropriate steps to protect their business as are in the best interests of creditors generally, directors should mitigate their personal risk of claims such as wrongful trading and misfeasance by:

  • taking and acting on appropriate legal and financial advice

  • holding regular board meetings to discuss the company’s financial position ensuring they have accurate, reliable and current financial information at all times.  This should include information on daily cash receipts and requirements and extended cash flow forecasts.

  • monitoring creditor pressure closely

  • keeping detailed minutes of the discussions and note the basis of all decisions made

  • maintaining good lines of communication with creditors, suppliers and other key stakeholders

  • engaging with lenders and other key stakeholders including The Pension Regulator where appropriate

  • ensuring they have relevant and sufficient D&O insurance cover in place

Directors of public companies must also be mindful of their additional reporting and disclosure duties under relevant market rules. 

How can we help?

If you are concerned that your business may be facing a period of financial difficulty and would like to discuss with us in confidence how best to comply with your duties as a director during this turbulent time, please contact our restructuring expert listed below, who will be happy to guide you through your obligations

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