COVID-19: Director’s Duties

COVID-19 Business, but not as we knew it

Directors' Duties

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COVID-19 Business, but not as we knew it:

Directors' Duties 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.

Johnathan Rees Partner johnathan.rees@laytons.com +44 (0)20 7842 8000

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COVID-19 | Directors' Duties

Directors' Responsibilities

Directors' Duties

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:

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

• directors are ultimately accountable for the actions

success of the Company for the benefit of its members as a

of their company regardless of whether they have

whole (widely perceived to be synonymous with acting in the

delegated a particular responsibility

best interests of the shareholders as a whole). In so doing,

• the legislation makes no distinction between executive

they must have regard to the long term consequences of

and non-executive directors - the rules are the same for

any decision and a number of other factors including the

all directors

Company's employees and relationships with suppliers and

• the nationality or place of residence of a director is also irrelevant

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.

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COVID-19 | Directors' 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

• Management information

The directors should strive to meet (remotely) regularly

The internal communication chains within the business

to ensure that they are properly informed of all aspects

must be robust and effective. The availability and quality

of the business (subject to the company’s articles to

of real time financial and operational information will

ensure board meetings can be held virtually). Minutes

be key to ensuring that decisions are properly informed

of meetings should be taken and circulated so that

and can be defended. Directors should also consider

directors are clear on what was agreed and an audit trail

how to secure reliable information in the event of

is constructed documenting the rationale for decisions.

disruption to the flow of management information within or outside the organisation.

• Communication Maintaining a dialogue with key stakeholders from

• Financial

lenders to investors, landlords, staff, key customers and

The directors should have access to up-to-date and

suppliers. It is equally important to understand how

accurate cash-flow information – what cash resources

customers, suppliers and sub-contractors are being

are available (e.g. has the business taken proper

affected so the business can adapt to any disruption as

advantage of the government’s job retention scheme),

quickly possible e.g. taking in-house the responsibility

what steps can be taken to manage expenditure without

for certain services or functions.

affecting the viability of the business and what steps can be taken to mitigate the risk of debtor defaults.

• Government support

Investors will be equally anxious to have access to

What cash and liquidity can the business secure in the

up-to-date and reliable management and financial

short-term? The directors should ensure that they are

information.

aware of all available central and local government support and that the application process is properly

• Contracts

delegated and managed. External advisors should be

The directors should review the company’s key contracts

a key source of valuable information. A dialogue with

to identify any potential breaches and defences or

lenders should be established early to ensure that any

claims (“get-out” provisions ranging from force majeure

funding application process is completed properly and

to material adverse change and contractual frustration

in a timely manner.

have become the subject of close scrutiny by litigators).

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COVID-19 | Directors' Duties

Wrongful trading • 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.

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.

• Advisors and NEDs The directors should maintain a regular dialogue with

Cognisant of the unique challenges posed by Covid-19 and its

the company’s professional advisors and any non-

own protective measures, the government has announced a

executive directors.

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.

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COVID-19 | Directors' Duties

Expertise

Corporate & Commercial We provide a complete range of corporate and commercial advice and support for clients who extend from start-ups, individual entrepreneurs and family offices to multinational corporations.

We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market.

Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.

Katherine Beasley

Rebecca Chang

Ryan D'Souza

Associate Partner katherine.beasely@laytons.com +44 (0)20 7842 8000

Solicitor rebecca-chang@laytons.com +44 (0)20 7842 8000

Solicitor-Advocate ryan.dsouza@laytons.com +44 (0)20 7842 8000

John Gavan

Miriam Giorgioni

Esther Gunaratnam

Partner john.gavan@laytons.com +44 (0)20 7842 8000

Lawyer miriam.giorgioni@laytons.com +44 (0)20 7842 8078

Partner esther.gunaratnam@laytons.com +44 (0)20 7842 8000

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Partner dimitri.iesini@laytons.com +44 (0)20 7842 8081

Partner daniel.oldfield@laytons.com +44 (0)20 7842 8037

Partner robert.macginn@laytons.com +44 (0)20 7842 8000

Katherine Martyn

Daniele Penna

Johnathan Rees

Trainee Solicitor katherine.martyn@laytons.com +44 (0)20 7842 8000

Partner daniele.penna@laytons.com +44 (0)20 7842 8053

Partner johnathan.rees@laytons.com +44 (0)20 7842 8009

Christopher Sherliker

Cameron Sunter

Liza Zucconi

Partner christopher.sherliker@laytons.com +44 (0)20 7842 8015

Partner cameron.sunter@laytons.com +44 (0)20 7842 8036

Partner liza.zucconi@laytons.com +44 (0)20 7842 8092

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