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Coronavirus: considerations for company directors
Last updated: 7th April 2020
As the Coronavirus continues to spread and businesses feel the pressures of managing a combination of reduced workforces and cashflow constraints, directors need to be aware of the steps to take in order to protect themselves and their businesses.
Whilst in the current climate of rates holidays and tax deferrals it is tempting to think decisions will not be subject to scrutiny but directors duties remain very much alive and decisions made now will likely be subject to scrutiny post COVID-19 where attitudes may be less permissive.
The government has made several commitments to ensure that businesses can continue to trade through this pandemic. Directors need to ensure that they understand and have considered the range of options available to them and to their employees in terms of finance, furloughing, rates reductions etc.
It is also important to think about the reputational impact of your decision making amongst clients, staff and the wider world. Directors answering to billionaire owners of football clubs should take note here!
Whilst taking legal advice is often the staple answer to questions in this area the lawyers can’t easily stop you getting a mauling on Twitter or Good Morning Britain.
When this crisis ends customers and staff will make decisions based on actions taken now with the benefit of hindsight and pay little regard to the legal basis upon which they were made at the time.
It remains the case that a director is subject to a set of legal duties, often called fiduciary duties.
The key duties owed by a director to a company (effectively its shareholders) is set out in the Companies Act 2006 which essentially codifies the long established common law position.
The Companies Act provides that a director must act in the way that they consider, in good faith and will promote the success of the company. In carrying out this duty, directors must also have regard to the long-term impact of their decisions and the interests of employees (amongst other considerations).
In addition, they also have a general duty to exercise reasonable care, skill and diligence when acting in their capacity as director.
As alluded to above at the time of writing there is much media discussion around the treatment of employees by football clubs with wealthy owners in the context of furloughing.
Outside the morality of such decisions and risk of audit by HMRC down the line it is worth remembering that having regard to employees should factor into decision making regardless of the wider situation – the current pandemic doesn’t change that.
A brave New World – New Challenges for Directors
Covid-19 has created a host of short and mid-term challenges that require new and often innovative solutions. Furloughing staff, enforced home working and virtual meetings all throw up new challenges. In normal circumstances, these solutions may not be in the best interests of the company, especially if the company operates in sectors such as manufacturing where hands-on workforces are essential.
Director’s duties clearly need to be viewed in the wider context but they can’t be ignored.
Mid to long-term survival should form the basis of a director’s decisions, all of which should be made in “good faith”.
Whilst Courts typically refrain from questioning the commercial decisions of directors and therefore it is envisaged that, for the most part, these critical board decisions would be promoting the long-term success of the company, that doesn’t remove the need to consider your obligations and test your assumptions.
What looked like a reasonable decision two weeks ago may have a different complexion two weeks from now so directors need to assess decisions regularly in the context of a fast moving post COVID-19 landscape.
Importantly these considerations highlight the importance of taking extra care when making board decisions during this period and how directors must always bear in mind the long-term success and the interests of shareholders when deciding how to preserve the workforce and cut overheads in the short term.
Switch in Duty
Directors should also be aware that when their business faces financial risk and the threat of insolvency, that recipient of their duties to switches. A director of a company on the verge of or in insolvency no longer owes a duty to its shareholders but to the company’s creditors.
Directors should ensure that they know who their creditors are and how much the are owed.
Whilst recent changes have made insolvency less of a risk it is still a very real threat. When assessing the risk of insolvency adopt a prudent approach to cashflow and risk, and always seek professional advice.
Cash is King – Managing Risk in Insolvency
Wrongful trading is the primary course of action that poses a threat to a director of a company facing the threat of insolvency during this time.
Directors are prohibited from wrongfully trading, which essentially means that they knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration, however they continued to carry on trading.
Such an action is instigated by shareholders but brought by the company and if successful, will result in the director having to account for the deficiency in the company’s asset value between the time in which he/she knew the company would become insolvent and when the company went goes into liquidation.
For any queries relating to how you approach the above, please contact a member of our Corporate Team.
If you have any concerns around how to approach decisions in relation to insolvency then our Business Recovery Team will be happy to discuss these with you.