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Company directors will be trying to do everything they can to protect and preserve the business. However, they do still need to remember their legal duties, so as not to expose themselves to the risk of personal liability if their actions go beyond what the law allows.
25 March 2020
Companies are now faced with unprecedented challenges presented by the coronavirus pandemic. In this context, company directors will be trying to do everything they can to protect and preserve the business. However, they do still need to remember their legal duties, so as not to expose themselves to the risk of personal liability if their actions go beyond what the law allows.
Practical steps which directors should be taking now, as explained in more detail below include:
If you are concerned about what the law requires of you as a director or your personal liability risk, or you have fears that your company may become insolvent, Collyer Bristow’s Corporate recovery and restructuring team can help steer you through these difficult decisions.
We are offering clients up to thirty minutes free legal advice. We are here to answer any queries or concerns you might have regarding the impact of Covid-19, what legal options are available to you, and what steps you can take to protect your business, your staff, or your job.
The running of the company is the responsibility of the board as a whole, so it is essential that decisions are taken collectively. This shares the burden, in these difficult times, and protects each director from taking risky unilateral decisions. We suggest a standing agenda including:
Almost all companies are allowed, under their Articles of Association, to hold meetings by telephone or videoconference. If directors are in different countries (whether willingly or due to travel restrictions), consider also the company’s tax residence. It may be appropriate to appoint additional local directors (if willing to act).
Keep minutes of these meetings. It’s always good practice, and may also protect you by showing your decision-making processes, if the company’s solvency is in doubt (more on this situation below).
Directors’ Statutory Duties
In all decision-making, remember the general statutory duty to promote success of the company for the benefit of the company’s shareholders as a whole, and the statutory factors which directors must take into account:
If you are in doubt as to what your duties require, or how to balance competing factors, seek professional advice. If you are worried that the company may be in financial difficulty the emphasis of directors duties shifts from being owed mainly to the company, to being owed to creditors, and at that point the directors must take every step with a view to minimising loss to creditors. We can give advice on this, and how it affects what you can and can’t, and should and shouldn’t, do as directors.
The company as a separate entity
It is a foundation of company law that each company has its own separate identity. It does not share in the assets belonging to other group companies, nor does it have a call upon the assets of its shareholders. On the other hand, it does not bear the liabilities of any other group companies.
Therefore, think very carefully if any proposal would involve one company supporting another (e.g. by intragroup loans, end-of-day cash-sweeping arrangements, giving cross-guarantees or security) or any shareholder guaranteeing the debts of the company.
Risk of insolvency
As we have discussed earlier, if the company is at risk of insolvency, the emphasis shifts from acting in the best interests of the shareholders to protecting the company’s creditors.
If a company goes into insolvent liquidation and the directors knew, or ought to have known, that there was no reasonable prospect that the company could avoid the liquidation, then the directors may be liable for ”wrongful trading” and obliged to make a personal contribution to the company’s assets for the benefit of its creditors. In light of the unique challenges posed by the Coronavirus “lockdown”, the government has announced a suspension of the wrongful trading penalties for directors, for three months, to allow them to continue to pay employees and suppliers (to have retroactive effect from 1 March 2020). Nevertheless, they emphasised that “all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force”.
Even more seriously, if a director is knowingly party to the carrying on of the company’s business with the intent to defraud its creditors, he commits the criminal offence of “fraudulent trading” punishable by a significant fine and/or imprisonment. This remains fully in force.
If you are in doubt as to whether your company has a realistic prospect of survival, we strongly recommend that you seek professional advice as soon as possible.
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