As directors everywhere strive to adapt to the fast-changing landscape they find themselves confronted by a multitude of challenges and threats which collectively (or even individually) can quickly become existential in nature. This article examines the challenge facing directors in balancing the action required to enable their business to survive and their over-arching statutory duties.
Directors’ Responsibilities
Directors (the statutory meaning can capture unsuspecting individuals involved in running the company) are responsible for the day to day running of their business and ensuring that the company meets its legal obligations. The basic rule is that the directors should act together as a board though typically the board delegate powers to individual directors or committees. A few points to remember:
directors are ultimately accountable for the actions of their company regardless of whether they have delegated a particular responsibility
the legislation makes no distinction between executive and non-executive directors - the rules are the same for all directors
the nationality or place of residence of a director is also irrelevant
Directors’ Duties
The Companies Act 2006 provides a statutory code for directors’ duties. As a general rule the duties are owed by current directors not former directors (there are exceptions) and it is also important to remember that the duties are owed to the company and not to individual shareholders.
The directors' overarching obligation is to act in the way which they consider would be most likely to promote the success of the Company for the benefit of its members as a whole (widely perceived to be synonymous with acting in the best interests of the shareholders as a whole). In so doing, they must have regard to the long term consequences of any decision and a number of other factors including the Company's employees and relationships with suppliers and customers as well as the impact on the business’s community. The Covid-19 crisis is confronting directors on a daily basis with a range of matters which require immediate response and will impact the very survival of the business. In these circumstances it is inevitable that potential conflicts will arise between the decisions taken and the directors’ statutory duties.
How can Directors protect themselves?
Faced with these potential conflicts what can directors do to protect themselves if hindsight is unkind? Although there are few ways in which directors can be made personally liable to contribute to the debts of their company (see wrongful trading below), justifying one’s actions in the context of a business failure is a uniquely uncomfortable experience. In short, it is more important than ever that directors ensure that they are “across” all aspects of their business:
Decision-taking
The directors should strive to meet (remotely) regularly to ensure that they are properly informed of all aspects of the business (subject to the company’s articles to ensure board meetings can be held virtually). Minutes of meetings should be taken and circulated so that directors are clear on what was agreed and an audit trail is constructed documenting the rationale for decisions.Communication
Maintaining a dialogue with key stakeholders from lenders to investors, landlords, staff, key customers and suppliers. It is equally important to understand how customers, suppliers and sub-contractors are being affected so the business can adapt to any disruption as quickly possible e.g. taking in-house the responsibility for certain services or functionsGovernment support
What cash and liquidity can the business secure in the short-term? The directors should ensure that they are aware of all available central and local government support and that the application process is properly delegated and managed. External advisors should be a key source of valuable information. A dialogue with lenders should be established early to ensure that any funding application process is completed properly and timely.Management information
The internal communication chains within the business must be robust and effective. The availability and quality of real time financial and operational information will be key to ensuring that decisions are properly informed and can be defended. Directors should also consider how to secure reliable information in the event of disruption to the flow of management information within or outside the organisation.Financial
The directors should have access to up-to-date and accurate cash-flow information – what cash resources are available (e.g. has the business taken proper advantage of the government’s job retention scheme), what steps can be taken to manage expenditure without affecting the viability of the business and what steps can be taken to mitigate the risk of debtor defaults. Investors will be equally anxious to have access to up-to-date and reliable management and financial information.Contracts
The directors should review the company’s key contracts to identify any potential breaches and defences or claims (“get-out” provisions ranging from force majeure to material adverse change and contractual frustration have become the subject of close scrutiny by litigators).Risk management and internal controls
Monitor the impact of remote working and the closure of business premises on risk management processes and internal controls. Consider mitigating actions.Insurance
Review the company’s policies and in particular its business interruption and force majeure provisions. It is vital that your business has directors' and officers' liability protection.Advisors and NEDs
The directors should maintain a regular dialogue with the company’s professional advisors and any non-executive directors.
Wrongful trading
Wrongful trading is one of the few ways in which directors can incur personally liability and arises on an insolvent liquidation or administration where it is established that the directors knew or ought to have concluded, at some point before the commencement of the company’s liquidation or administration, that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration.
Cognisant of the unique challenges posed by Covid-19 and its own protective measures, the government has announced a temporary suspension of the wrongful trading rules to remove the threat of directors incurring personal liability during the Covid-19 pandemic. This it is hoped will improve the insolvency system for struggling businesses and provide them with additional time and space to navigate the current crisis. The change in law applies retrospectively from 1 March 2020.
Compliance
In a similar vein Companies House announced that companies affected by Covid-19 can apply for a 3 month extension for filing their annual accounts and HMRC has announced temporary changes to its guidance on stamping stock transfer forms and paying stamp duty.
