The Covid-19 pandemic is evolving rapidly resulting in new problems and challenges for businesses. With each new challenge that presents itself, directors will often be faced with having to make very difficult decisions. Key points to note at this time:
- directors must continue to act in accordance with their directors’ duties;
- wrongful trading rules have been temporarily suspended; and
- good corporate governance and record keeping is crucial.
The starting point is that directors’ duties, whether under the Companies Act 2006 or as extended under a company’s articles of associations, continue to apply and have not been relaxed to any extent to date. For example, directors must continue to promote the success of the company or act in its best interest, avoid conflicts of interest and exercise reasonable skill, care and diligence. Given the difficulties that the Covid-19 pandemic is causing to some businesses, directors must still behave reasonably and appropriately at all times and take actions that are for the benefit of the company or, where the company is in serious financial difficulty or insolvency, are for the benefit of creditors. Such actions, which will vary from business to business, could include reducing overheads, seeking additional funding, concentrating on core business, moving into different markets, delaying or cancelling projects or cutting back or closing a business. Balancing the various interests that are at play, or could potentially be in play as a company approaches financial difficulty, in such unique and complicated circumstances requires directors to tread very carefully.
In the updated government guidance on the Coronavirus Job Retention Scheme published on 4 April 2020, it was confirmed that office holders, including company directors, can be furloughed. Directors who are furloughed are allowed to continue with their statutory duties provided they do no more than reasonably necessary but they “should not do work of a kind that they would carry out in normal circumstances to generate commercial revenue or provides services to or on behalf of their company”. This means that directors can work on the accounting records, deal with the accounts and maintain statutory records but cannot undertake their usual commercial/operational roles or seek new work. Equally, furloughed directors should not consider that their statutory duties are simply suspended whilst they are furloughed.
On 28 March 2020, the Business Secretary announced a temporary suspension of wrongful trading rules under the Insolvency Act 1986 so that the threat of directors facing personal liability during the Covid-19 pandemic is removed. The specific legislation is to follow but it will take effect retrospectively from 1 March 2020 for a period of three months. The wrongful trading rules provide that if it appears that, in the course of an insolvent winding-up or insolvent administration, a person who is or was a director of the company knew or ought to have concluded before the commencement of the liquidation or administration that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration but continued to trade nonetheless, such director can be required to contribute personally from his own assets to the company’s assets. The temporary removal of this personal liability should give directors a bit more flexibility when making the challenging decisions they may face as the Covid-19 Pandemic continues. Personal liability in the context of fraudulent trading has not changed.
Good corporate governance is important at all times but particularly so during difficult times such as the Covid-19 pandemic as the actions of directors will be under increased scrutiny at these times. Directors can mitigate the risks they face in this regard by holding regular board meetings which are properly minuted (in which minutes the directors set out their reasons to justify the taking of a particular decision), maintaining accurate books and records, staying up to date with the company’s financial and trading position, considering all options available to them whether from insurers, banks or the government and communicating clearly with shareholders, lenders, creditors, suppliers, customers and employees throughout.
If you would like to discuss further or enquire about advice on directors’ duties, the suspension of the wrongful trading rules or corporate governance, please call one of the Knights' Corporate team.