Director’s Duties and Coronavirus

DIRECTOR’S DUTIES AND CORONAVIRUS: HOW TO RUN YOUR SHIP WHEN A TSUNAMI HITS

Written by: Martyn Kolankiewicz, Freeths Solicitors

As the chaos caused by the coronavirus outbreak continues to impair global markets, creating unprecedented challenges that may prove to rival the 2008 financial crisis, directors are having to consider not only how to cope with the immediate effects on their business, such as supply chain disruption and employee retention, but also the potential longterm implications of their decisions. Indeed, with the economy journeying toward a steep downturn, in such uncertain times it is especially important for board-level decisions not to exacerbate deterioration.

For private companies, the Government has issued a Coronavirus Job Retention Scheme which offers access to a grant covering up to 80% of the average wage for employees who would otherwise be dismissed, worth up to £2,500 per month (see Coronavirus: Job Retention Scheme for details). Additionally, the Chancellor of the Exchequer, Rishi Sunak, announced in March that state protection will be offered in order to prevent the coronavirus outbreak from bringing the economy to its knees. Such measures include state-backed loans of at least £330 billion of tax breaks (see Coronavirus: FAQs regarding Government-backed Business Support for further information).

“Indeed, with the economy journeying toward a steep downturn, in such uncertain times it is especially important for board-level decisions not to

exacerbate deterioration. ” Martyn Kolankiewicz Freeths Oxford

On 20 May 2020 the Corporate Insolvency and Governance Bill 2019-21 was announced and is currently making its way through Parliament. The Bill provides for amendments to the Insolvency Act 1986 and the Companies Act 2006 on various areas of principal interest. Amongst the changes to the insolvency regime the Bill proposes a new statutory moratorium process, a new restructuring plan procedure and restrictions on the presentation of debtrelated winding-up petitions. The Bill also includes a retrospective coronavirus provision for wrongful trading. This provides that the Courts are to ignore the period between 1 March 2020 and the later of 30 June 2020 or one month after the Bill comes into effect (whichever is later) when assessing the amount of compensation payable by a director who is subsequently found liable for wrongful trading. The Bill is however not law yet and may well not become so before the end of June; the report stage in the House of Lords takes place on 23 June.

DIRECTORS’ DUTIES

In addition to considering the implementation and knock-on effects of the new measures and ensuring continued compliance with regulatory obligations, such as health and safety laws, directors should carefully reflect on how the coronavirus outbreak may impact their duties as directors.

The Companies Act 2006 (“CA ‘06”) sets out in sections 171 to 177 the general duties owed by a director of a company which include:

a duty to act within powers (section 171); a duty to promote the success of the company (section 172); a duty to exercise independent judgement (section 173); a duty exercise reasonable care, skill and diligence (section 174); a duty to avoid conflicts of interest (section 175); a duty not to accept benefits from third parties (section 176); a duty to declare interest in proposed transaction or arrangement (section 177).

Where a company starts showing signs of financial distress leading towards insolvency, the directors should prioritise the creditors. If directors implement robust, forward-focused decision-making now, their struggling business may turn around once the pandemic has receded. Despite the need to think proactively and positively, it should be borne in mind that these are unprecedented times and there may be long-term disruption to supply chains and to client bases, resulting in a slow recovery of confidence and ‘business as usual’.

WRONGFUL TRADING PROPOSAL

The proposed suspension of the liability for wrongful trading under the Insolvency Act 1986 (“the IA 1986”) should not be seen by directors as an excuse to relax their compliance with their duties and obligations as directors. The suspension is only temporary and it is unclear at present whether there are circumstances in which the provision in the Bill could be rebutted, as is possible with other offences under the IA 1986.

Directors should also note that the fraudulent trading provisions under the IA 1986 continue to apply, in the event that a director carries on a company’s business with the intent to defraud creditors or for any fraudulent purposes.

“Where a company starts showing signs of financial distress leading towards insolvency, the directors should prioritise the

creditors. ” Martyn Kolankiewicz Freeths Oxford

The provisions under the IA 1986 relating to misfeasance (breach of fiduciary or other duty) and reviewable transactions, such as preferences, transactions at undervalue and transactions defrauding creditors, are also still in force. The same applies to the directors’ disqualifications rules.

ADVICE

In order to mitigate their personal liability in claims such as misfeasance, directors should consider taking the following actions:

seek appropriate legal and financial advice; keep up to speed on the FRC and FCA guidance; hold regular board meetings of the directors in order to consider the company’s current financial position and to ensure that all financial information is up to date, accurate and reliable; monitor creditors closely and maintain clear communication streams with creditors; ensure that appropriate directors and officers liability insurance is in place; and if appropriate, liaise with lenders and other stakeholders, such as the Pension Regulator.

To keep up to date with the legal implications of the coronavirus outbreak, go to our Coronavirus Hub.

Martyn.Kolankiewicz@freeths.co.uk 0845 404 4194 www.freeths.co.uk