Directors Duties in the face of Covid-19
Directors are often put under the spotlight in difficult times due to their management and decision making responsibilities.
- Promote the success of the company
- Exercise independent judgment, reasonable care and skill
- Avoid conflicts of interest
The Court has the power to order that a director personally contributes to a company's assets if it they are held to be in breach of its Creditor Duties. Accordingly, it is vital that directors recognise when a company is, or is likely to become, insolvent.
A company is generally deemed insolvent by reference to Section 123 of the Insolvency Act 1986 if it cannot pay its debts as they fall due (Cash Flow Test), or its total assets are less than its liabilities (both contingent and prospective) (Balance Sheet Test).
Directors should consider that the balance between General Duties and Creditor Duties moves on a sliding scale:
Regardless of the size and financial health of the business, our advice to all company directors is to:
- Maintain accurate financial reports about the performance of the business, its debtors and its liabilities;
- Hold regular meetings with fellow directors ((daily if circumstances require it) so that the risk of financial difficulty (and the threat of insolvency) is monitored and assessed;
- Carefully consider and evaluate any significant transactions to ensure that any board decisions can be justified in due course as having been in the best interest of the Company or its Creditors (as applicable). This is particularly important in respect of any lending facility that you may seek from your bank (or the Government).
- Seek professional advice if you are concerned that the company has become insolvent, or that it cannot reasonably be avoided in the future (note that this also applies to individual directors who may be worried about any decisions the board is taking - as this can potentially be relied upon in any defence to a wrongful trading claim).
- Maintain Directors and Officers insurance which can offer some protection against potential legal action, as can s1157 of the Companies Act 2006 in defending any breach of duty claim if the Court considers that the director has acted honestly and reasonably.
- Keep abreast of all Government updates, measures, guidance and any new legislation relating to COVID-19 – including any financial assistance (in the form of grants and/or loans) which may become available to businesses in the immediate future.