We are currently living in very uncertain times with a crisis that is affecting our lives and businesses. As the Covid-19 situation develops, the effects on your business could well be severe.
It seems likely that the law relating to directors duties will be relaxed or at least applied in a less stringent manner to take account of this unprecedented situation. The UK government has been anxious to stress the need for businesses to try to continue to trade wherever possible and is announcing funding and reliefs to struggling UK businesses as the effect of the pandemic starts to bite in the UK. The situation is evolving incredibly rapidly.
Notwithstanding this, directors will be expected to behave reasonably and appropriately and to take actions, where the company is in serious financial difficulty or insolvency, which are undertaken for the benefit of the creditors at all times.
Those actions could well involve appropriate measures to reduce overhead, seek additional funding, concentrate on core business, move into different markets or to scale down or even mothball a business. There is no one size fits all and the directors of the business should be best placed to determine strategy with the intention of protecting the business and acting in the best interest of creditors.
Where there is no reasonable prospect of avoiding insolvent liquidation, then steps should be taken to put the company into liquidation and trading on for any length of time should only take place in very limited circumstances.
There are other requirements on directors, when a company is insolvent or on the verge of insolvency. These include not preferring any particular creditor over another with a desire to do so. This would include for example, repaying a directors loan or giving a creditor that is connected with the directors or the company security over company assets in respect of a historic loan. In addition, directors must not transfer assets of the company for substantially less than they are worth.
Directors can face personal liability if they act in breach of their duties as directors.
Risk Reduction
Directors should consider the following to mitigate the risk of future claims against them personally when the company is in financial distress:
- Have regular directors meeting which are fully minuted.
- Keep up-to-date with the company’s financial position including its cash flow, liabilities and relationships with customers.
- Fully investigate all of the reliefs and funding offered by the government and your bank.
- Consider whether you have any claim under your business insurance, including business interruption claims.
- Stress test any decisions that you intend to make. Continuously review the decisions that you are taking particularly given the quickly evolving nature of the crisis.
- Keep in regular contact with the stakeholders of the business and keep them properly informed. These will include shareholders, lenders, creditors (particular key creditors), key suppliers and customers.
- Maintain accurate company books and records.
- When a critical decision needs to be made, carefully review the options available and ensure that the justifications are recorded in writing at each stage with regular board minutes convened.
- Be prepared to challenge the strategies of other directors e.g. disposals (potentially a transaction at an undervalue), dividends, directors’ bonuses etc. as all of these and more, will be investigated if an insolvency ensues.
- As soon as directors become aware of any financial difficulties it is also important to seek professional advice from accountants and lawyers. The earlier an issue is caught, and appropriate action taken, the less likely it is that directors will be held liable for the company’s demise.
During the current pandemic, we will continue to help our clients manage the impact and can advise on employment issues, commercial contracts, cash flow challenges, funding arrangements and your overall ability to conduct day to day business.
Please visit our dedicated Covid-19 Support page on our website or, if you need support, please contact us directly.
