Protect yourself and your duties as a director

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 long-term 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, recently commented that state protection will be offered in order to prevent the coronavirus outbreak from bringing the economy to its knees (see Coronavirus: FAQs regarding Government-backed Business Support for further information).

On 28 March 2020, the Secretary of State for Business, Alok Sharma, announced that a range of measures will be introduced to assist struggling companies during the pandemic. The changes to the insolvency regime will include new rules to enable companies undergoing restructuring to have access to supplies and raw materials. There will also be a temporary suspension of the wrongful trading provisions under the Insolvency Act 1986 to remove the threat of directors facing personal liability during the coronavirus outbreak. The proposed suspension will apply retrospectively from 1 March 2020 however the precise terms of the implementing legislation are yet to be published. Mr Sharma has in the meanwhile made it clear that all other checks and balances to ensure that directors continue to fulfil their legal duties and obligations will remain in place.

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 wrongful trading provisions 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.

Directors should 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.

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.

Next steps

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

Martyn.Kolankiewicz@freeths.co.uk