Directors’ Duties Amid COVID-19

20th May 2020
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COVID-19 has mounted enormous financial pressure on businesses as they combat irregular cashflows during these uncertain times. As we move into the summer months, many businesses that rely on seasonal income are most at risk. This has led to an unprecedented move by the Government to safeguard businesses from financial collapse in the shape of business support grants, the Coronavirus Business Interruption Loan Scheme, and the Job Retention Scheme. However, it’s clear that many companies are still struggling to remain solvent as a result of the impact caused by this pandemic emergency, especially when access to cash has been sluggish.

Under the Insolvency Act 1986 a director of a limited liability company can be deemed personally liable where they knew (or ought to have concluded at some point prior to commencement of insolvency or administration) there was no reasonable prospect that the company would avoid going into insolvency or liquidation. This is known as ‘wrongful trading’ and is reinforced by section 172 (3) of the Companies Act 2006, which imposes a duty on directors to act in the best interests of the creditors of the company.

Accordingly, directors have rightfully been concerned they are opening themselves up to a personal claim if they continue to trade. However, the Government will temporarily suspend wrongful trading rules effective from 01 March 2020 and will legislate at the earliest opportunity. This is a welcome move as it provides greater confidence and will keep companies trading without the threat of personal liability looming if the company falls into insolvency.

Notwithstanding the suspension, all other checks and balances to ensure directors continue to fulfil their duties and obligations will remain intact. Further, the shift in directors’ duties described above may require a material change in the decision-making process and conduct. Therefore, it’s vitally important for directors to continue to record and monitor their decisions during the suspension and assess whether they have been made as a result of Covid-19 or to conceal other long-standing issues.

What actions should directors be taking to protect their businesses to discharge their directors’ duties?

  • Conduct regular board meetings and duly consider the impact of Covid-19 on decision making;
  • Document all board meetings providing a clear record of the decisions made;
  • Seek professional advice on any commercial and financial obligations that are unclear before deciding on your course of action; and
  • Approach creditors to negotiate payment plans and payment holidays.

The above is not a definitive legal guide and so professional advice should be sought for each matter affecting your company, where appropriate. If you have any concerns about directors’ duties and the impact of Covid-19, then please do not hesitate to contact Neel Ummat at 01273 249224 or via his email address to discuss further.