COVID-19 Webinars: Supporting Businesses in a Time of Crisis | Webinar #14

HSM

COVID-19: Sole Trader, Director and Shareholder Liability A Presentation given to the Cayman Islands Chamber of Commerce

Presented By: Ian Lambert, Adam Crane and Peter de Vere 29 May 2020

Overview

HSM

Our presentation will cover the question and following areas: Can I be personally liable as a sole trader, director or shareholder if my business fails as a result of COVID-19?

• The extent to which directors, shareholders and sole traders are or can be held personally liable; • The duties owed by directors and the impact of COVID-19 on those duties; • Suggestions for the management/mitigation of risk.

Business Failure as a Result of COVID-19

HSM -

Implications against sole traders, company shareholders and company directors

-

Business can fail for a number of reasons: o Changes in trends/demographics o Bad management o Etc.

We are solely focusing on a change in economic factors – in this case an “act of God�.

-

There have been economic forces putting pressure on businesses (2008 global recession) but Cayman has been somewhat recession proof. Cayman has seen growth and prosperity rarely seen in the region over the past decade.

Liability Profiles

HSM

Sole Trader

• Unlimited personal liability

Director

• Free from personal liability unless: • Signs a personal guarantee • Commits an act of fraud or negligence or a breach of civil or criminal laws • Breaches of fiduciary duties (i.e. insolvent trading, etc.)

• Indemnification

Shareholder

• Only liable for any unpaid portion of shares held

HSM

Sole Trader Liability • Why shouldn’t I set up as a sole trader?

• The benefit of being a sole trader often boils down to cost savings (incorporation and maintenance of a company).

• “Liability waivers” are useful but you cannot waive liability for negligence.

Director and Shareholders Liability •

• •

•

•

A company is a separate legal entity as distinct from its members, therefore it is separate at law from its shareholders and directors.

A company has its own separate personality where it can sue and be sued its name.

This separate legal personality provides the shareholders limited liability protection which would otherwise need insurance coverage for a sole trader.

Shareholders are only liable to a company for any unpaid portion of their shares which may be “called” by the company at any time and if any calls are not met the shares may be forfeited.

Unpaid/partially paid shares are not able to receive dividends and may not be able to be voted.

HSM

HSM

Director Liability (Cont.)

• Directors, like shareholders are free from personal liability unless they commit and act of fraud or negligence or breach civil/criminal laws.

• Whilst a breach of criminal/civil laws may attract an action from the state/Crown all other derivative actions against a director must be brought by the company’s shareholders (in the case of a closely held company this may not pose an issue…i.e. a shareholder is unlikely to sue a director if they are one and the same person).

Director Duties: Fiduciary

HSM

1. Duty of Loyalty (fiduciary) Main Fiduciary Duties

Bona Fides

Proper Purpose

Property

Conflict of Interest

• (Latin for good faith) – this is subjective. Did the director believe he/she was acting in the best interests of the Company?

• Must use their powers for the purpose on which they were conferred and not for any collateral purpose (e.g. issuing more shares to maintain control of the company).

• Must act as trustees of the company’s property (this includes cash in an account). Directors must also not misapply a company’s property) i.e. dispose of assets without proper consideration.

• Must not put themselves in apposition where their personal interests conflict with interests of the company. Any conflict should be declared to the company.

HSM

Director Duties: Skill and Care 2. Duty of Skill and Care • A director owes a personal duty to inform himself/herself about the affairs of the company and join with his/her co-directors in supervising and controlling its affairs. • Duties are owed to the Company as a whole (not just the shareholders) E.g. duties towards creditors, especially where a company may be insolvent. • A director allowing a redemption when a company is insolvent can be liable of a fine up to CI$15,000.00 and 5 years imprisonment.

HSM

Directors Duties and COVID-19 • Directors owe duty to company • Zone of Insolvency • Duties owed to creditors • Mitigating Risk & Discharging Duties • Establish COVID-19 committee and meet regularly • Seek external financial and legal advice • Communicate and negotiate with creditors/lenders • Document meetings, discussions and decisions • Take advantage of Government programs • Consider restructuring / liquidation options

Personal Guarantees •

A Personal Guarantee is normally requested of shareholders when a Company does not have sufficient collateral. It may be requested from a Director (but unusual).

•

A Personal Guarantee should:  be formally drafted;  stipulate that the Guarantor had been given the opportunity (or waives the right) to seek legal advice; and

 be signed and witnessed as a deed.

•

A Personal Guarantee will mean that the person executing will need to meet the company’s obligations if the Company is unable to.

HSM

HSM

Indemnification • Are typically built into the M&A but a more robust indemnification agreement can be put in place if the directors require. • Indemnification agreements are set up to have the company indemnify the director against legal costs etc.

HSM

COVID-19 Considerations • Force Majeure & Contract Frustration • Economic Slowdown • Business Models • Not easily adaptable to change

Force Majeure & Contract Frustration •

Check your current contracts for “act of God” provisions and seek legal advice where applicable.

•

Doctrine of Frustration – Test: Has an event occurred after the formation of the contract – Is that event fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered into the contract – Neither party is at fault – Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties

•

Consequences: – Frustrated contacts are deemed to be at an end but notice should be given of frustration – The parties are discharged from their future obligations – A party may still be obliged to perform “pre-frustration” matters – No damages can be claimed for the other parties non performance

HSM

Insolvency in the Cayman Islands • • • •

Personal bankruptcy vs. corporate insolvency Personal bankruptcy – Bankruptcy Law (1997 Revision) Corporate insolvency – Companies Law (2020 Revision) Using strike offs to avoid liability

HSM

Personal Bankruptcy in the Cayman Islands • • •

• •

• •

Bankruptcy Law (1997 Revision) – Grand Court (Bankruptcy) Rules 1977 (as amended) Uncommon Who can start bankruptcy proceedings?

– Debtor – Any creditor if owed at least CI $40.00 Opportunity for settlement before bankruptcy order What happens after bankruptcy order?

– Property vests in the Trustee – Trustee administers Estate Rent Discharge from bankruptcy

HSM

HSM

Corporate Insolvency in the Cayman Islands • Corporate insolvency • Companies Law (2020 Revision) • Companies Winding Up Rules, 2018 • Foreign Bankruptcy Proceedings (International Co-Operation) Rules, 2018 • Insolvency Practitioners Regulations 2018

• Restructuring • Provisional Liquidation • Scheme of Arrangement • Voluntary vs. Compulsory Liquidation

HSM

Mitigating Risk • Avoid personal guarantees where possible • Insurance coverage

• Indemnification agreements • Cut expenses • Difficult decisions to be made…such as redundancies • Increase sales/generate new revenue • Adapt and find new methods and opportunities • Is this a good time to start a business?

• Reduced fees/incentives for small and micro businesses /government grants etc.

• Learn • Use this as a learning opportunity…more knowledge leads to new solutions/more solutions

HSM

Questions?

HSM Contact Us

Ian Lambert Partner | Head of Litigation, Insolvency and Restructuring E: ilambert@hsmoffice.com T: 345 936 7421

Adam Crane Senior Associate E: acrane@hsmoffice.com T: 345 936 7364

Peter de Vere Head of Corporate and Commercial E: pdevere@hsmoffice.com T: 345 938 7360

Thank you for attending this presentation on business liability and COVID-19.

Tel: 345 949 4766 www.hsmoffice.com info@hsmoffice.com

Disclaimer This presentation is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this presentation without first obtaining specific professional advice. Alternative solutions also exist which may better suit the requirements of a particular individual or entity.

HSM