Partners David Murray and David Few, in our Dispute Resolution and Corporate teams, explain the impact of the ongoing situation on company directors’ duties, board meetings and filing accounts.
In light of the Coronavirus (COVID-19) pandemic, directors of limited companies are facing a series of unprecedented challenges. Not least, continuing to comply with the Companies Act 2006 and laws relating to insolvency during a period of significant general and economic uncertainty.
Following recent new legislation, designed to help businesses improve their immediate cash flow situation and encourage them to retain their workforces (by placing employees on “furlough leave” if necessary), further changes were announced by Business Secretary Alok Sharma MP on 28 March 2020 that temporarily relax company directors’ statutory obligations and indeed their liabilities if these are breached.
Directors’ duties and the risk of insolvency
Should a company find itself in a period of financial distress, even given extraordinary circumstances like these, its directors must continue to act in good faith and in the company’s (and its shareholders’) best interests.
However, should a company’s directors have concerns over the ongoing financial viability and/or the potential insolvency of their business their overriding duty switches to protecting the interests of the company’s creditors.
If a company does enter insolvency liquidation and its directors are found not to have fulfilled their duties; for example if it can be demonstrated that they allowed the company to continue to trade whilst they knew (or ought to have known) that there was no reasonable prospect of avoiding insolvency, they can be held personally liable for wrongful trading (under the Insolvency Act 1986). In such a situation, the appointed liquidator or administrator can seek financial contributions from directors to cover losses incurred by creditors during the period of wrongful trading. A company director could face director’s disqualification proceedings and be banned from serving as a director for a period of time.
However, on 28 March 2020 the Government confirmed that the wrongful trading law would be suspended retrospectively from 1 March 2020, allowing company directors to continue to pay staff and suppliers even if there are concerns that the company could become insolvent.
A temporary moratorium for businesses undergoing a restructuring process was also announced.
New legislation has also recently been brought in to prevent landlords from forfeiting a commercial lease due to the non-payment of rent until at least 30 June 2020, a period that may be extended.
Mr Sharma said that the Government’s objective is “to help UK companies which need to undergo a financial rescue or restructuring process to keep trading” and that the measures “will give those firms extra time and space to weather the storm and be ready when the crisis ends, whilst ensuring creditors get the best return possible in the circumstances.”
Jonathan Geldart, Director General of the Institute of Directors, described the changes as “pragmatic steps to provide relief during this unprecedented period”, while the British Chamber of Commerce's Head of Economics, Suren Thiru, said: “Businesses will welcome the government’s sensible steps to amend insolvency laws to help protect companies weakened by the impact of coronavirus.
It is right that the rules on wrongful trading are temporarily suspended to ensure that directors are not penalised for doing all they can to save companies and jobs during this turbulent period. Companies that were viable before the outbreak must be supported to ensure they can help power the recovery when the immediate crisis is over.”
Mr Sharma reiterated: “To be clear, all of the other checks and balances that help to ensure directors fulfil their duties properly will remain in force.”
During difficult or uncertain times it is more important than ever that boards of directors discuss and collectively make key decisions affecting the business.
It may be prudent for the board, particularly if a company is financially distressed, to convene more regularly than normal in order to remain agile and to respond to the changing landscape. The board may also need to keep under review whether the business, if in distress, should continue to trade. In such a situation, a company is advised to seek specialist advice from insolvency practitioners and/or solicitors at the earliest opportunity.
When conducting meetings virtually, information (particularly financial) should be made available to all board members in advance.
Directors may of course also be shareholders (as opposed to employees). It is paramount that all decisions are made in line with their statutory duties and not in their own interests.
These practices, and the keeping of detailed minutes explaining how the directors have also taken into account their statutory duties, can help to reduce the likelihood of a future claim or a dispute between shareholders.
Providing that the company’s articles of association permit (they may otherwise need to be changed) and that any meeting held virtually is quorate (has the minimum required number of board members in “attendance”), board meetings can be conducted by phone or via a video conference.
To prepare for the fact that some directors may fall ill and be incapacitated by COVID-19 (or any other illness) and given the ongoing disruption more generally, a board may opt to simplify its decision making processes by assigning specific responsibilities to committees or individual members of the board.
From 25 March 2020, companies will be able to apply for an automatic and immediate three month extension to file their accounts at Companies House. Companies that have already been granted an extension during the current filing period are unlikely to receive a further extension and for all companies, the usual penalties will apply if accounts are filed late.
For further information or legal advice, please contact email@example.com or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.