Impact of Covid-19 on directors


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We summarise below certain duties that directors of UK incorporated companies need to discharge and certain other matters that directors should consider in the current rapidly changing environment of Covid-19.

This alert is not intended to be exhaustive but to flag some of the key issues and alert directors to the importance of taking appropriate legal advice when in doubt.

Government support to help directors to discharge their duties
 
The government has announced an unprecedented package of support measures to assist UK businesses.  These measures include:

  • Coronavirus Business Interruption Loan Scheme (CBILS)
  • Bounce Back micro loan scheme for small businesses
  • Job Retention Scheme  (furloughing)
  • Small business grants
  • Retail, hospitality and leisure businesses' cash grants and business rates holiday
  • Coronavirus Statutory Sick Pay (SSP) Rebate Scheme
  • Time to pay outstanding tax liabilities
  • 3 month deferral of VAT from 20 March
  • Suspension of wrongful trading rules 
  • 3 month extension for accounts filing deadline for Covid-19.

Details of each support measure are available at our Covid-19 Client Hub here as well as at the government's summary on support available for businesses, please click here.

Discharging duties with the help of government support

Directors will need to consider carefully if their company needs government support to stay afloat.  When considering this issue, directors need to be mindful of the fiduciary duties they owe to their company. 

When a company is solvent, a director has a statutory duty to act to promote the company's success having regard to stakeholders' (notably shareholders') interests (section 172(1) of the Companies Act 2006 (CA)).  However, if a company is struggling and is on the verge of insolvency or, is in fact insolvent, then this duty changes to become a duty to act in the interests of creditors (section 172(3) CA).  It is sometimes a grey area as to precisely when the duty changes from one owed to stakeholders to one of protecting creditors and what such duty might require of directors in particular cases.  It is therefore critical for directors to take legal advice, especially if the company is considering accepting new orders/new credit/government support in an attempt to stay in business.  Directors may mitigate their exposure to liability by ensuring that they properly document their decisions – there is a need for a greater audit trail in challenging times.  

A breach of directors' duties may result in a director being subject to civil and criminal liability as well as facing the risk of disqualification.  If companies are considered to have been inadequately prepared for Covid-19, or they fail to effectively implement contingency plans, directors could face claims from various stakeholders, including employees and shareholders.  Furthermore, failure to properly disclose the risks and impact of Covid-19 could result in directors being subject to civil and criminal liability.

The government announced the proposed temporary suspension of the wrongful trading rules under the Insolvency Act 1986 (IA) (from 1 March – 1 June 2020) to give directors greater confidence to trade during this exceptional time.  However, other statutory insolvency rules such as fraudulent trading (section 213 IA), directors' general duties in the CA and the threat of disqualification will continue to apply as a deterrent against misconduct.

It is important that a director seeks appropriate legal advice about any concerns regarding the company's solvency, including whether to take advantage of government support.

Key issues for boards to monitor during Covid-19

In this uncertain and rapidly evolving situation, directors will need to manage their company's response to Covid-19.  This is likely to involve them taking some tough decisions under time pressure.  It is therefore increasingly important that directors closely monitor all aspects of the business. The relevant considerations will vary depending on the nature of the business but some of the key issues for directors to take into account are set out in the table below.

Employee and customer health and safety

Put appropriate measures in place to safeguard employee and customer health and safety (e.g. 2 metre social distancing rule and, if this is not practical for your business, consider how or if you can still operate).

Keep abreast of the latest government and official guidance and requirements and ensure that they are fully complied with.

Financial impact of Covid-19 and impact on cash flow

Regularly review the short-term and long-term financial impact of Covid-19 and preserve sufficient cash flow to trade. Does the company have sufficient capital (including credit facilities) and if not, can it raise shareholder funds or refinance its debt? Is the business a going concern and can it continue to trade as a going concern for the next 12 months?

The board should also discuss with the company's auditors if the company needs to make balance sheet adjustments or post balance sheet disclosures in relation to the impact of Covid-19. The ICAEW has published a Checklist: implications of COVID-19 on the preparation of accounts under FRS 102 to provide an overview of how the new environment we find ourselves in, and the actions companies may have taken in response, will affect the numbers and the disclosures required in the accounts. The ICAEW has also published a specific guide Coronavirus: how to distinguish adjusting from non-adjusting post balance sheet events.

Note that companies can seek a 3 month extension within which to file their accounts.

Risk oversight

Oversee the management's attempts to identify, prioritise and manage the main risks to the company's business as a result of Covid-19. This includes getting more regular accounting and internal reporting updates from the management and monitoring the company's compliance with its banking facilities.

Business continuity

The company should have a business continuity plan in place and regularly review and refine it as the situation evolves. Such a plan may include the following:

• Existing contracts: review existing contract terms to understand the impact of Covid-19 on the company's contractual obligations: can it meet its contractual obligations?
• Employees, supply chain and production disruption: assess the effect on employee disruption (does the company have sufficient staff to properly discharge its duties whilst maintaining their safety and well-being?) and on supply chain and production disruption (can the company source goods from elsewhere? Can it continue to produce goods?).
• Corporate transactions: consider the impact of Covid-19 on corporate transactions: can the company get out of such transactions without significant cost?
• Insurance: assess whether business interruption caused by Covid-19 is covered by existing corporate insurance policies. Check the terms of the D&O insurance and directors' indemnities to understand to what extent directors are protected from liability.

Company reporting

Consider directors' responsibilities to disclose the principal risks and impact of Covid-19 in the company's annual report.

Board meetings

Consider holding meetings virtually or by conference calls. ICSA has issued some helpful guidance on virtual board and committee meetings.

Communication strategy

Maintain regular internal and external communication as well as keeping a good record of the decision-making process.

Key person risks and succession planning

Ensure that the company has contingency plans if the CEO and/or other key personnel contract Covid-19; ensure that you know who will act as interim CEO

Remuneration

Review and consider executive remuneration (should pay be cut in line with cuts suffered by employees, should it be cut if the company has had to get government support?) and consider suspending incentive or bonus plans. The directors and managers need to be seen to be leading from the top and sharing employees' pain.

Beware though of taking voluntary pay cuts or giving up bonuses: strict rules have to be followed by both companies and employees (including directors) to avoid triggering a tax charge. These are especially important for directors of owner managed businesses as there are extra requirements for an individual who is a director.

Annual general meetings

Consider implementing a contingency plan to hold shareholder meetings given the current prohibition of social gatherings of more than 2 people (ICSA guidance is available suggesting possible ways to convene AGMs, and recommends the use of proxy voting).

Shareholder relations

Consider PR issues if the company takes government support and then continues to pay large executive salaries and/or shareholder dividends. Companies run by millionaires have attracted much public opprobrium in the media for taking advantage of government-backed (ie taxpayer-funded) assistance.

 

If you require any assistance on the matters discussed in this article, or if you have any other queries on challenges your business is facing in the current climate, please contact a member of the Corporate Department at Trowers & Hamlins LLP, or alternatively please consult our Covid-19 Client Hub here for further resource materials.

 

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