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Directors’ Duties

In the shadow of COVID-19, company directors are having to take decisions at speed across a range of issues.

The government is encouraging companies to help re-open the economy by bringing staff back to their work places. This challenge, alongside others that directors face, must be met against a backdrop of economic uncertainty, the end of the furlough scheme and planning for the repayment of government loans.

Directors are consequently having to take decisions at speed across an ever-increasing range of issues, whether related to health and safety or HR matters, on-going trading or company finances. Aside from the ever-present implications of COVID-19, one theme that links all of these decisions is the framework within which they are taken. Directors of all UK companies must comply with their statutory duties under the Companies Act 2006.

It is therefore an opportune time to remind directors of these duties, especially as a breach can lead to possible civil or criminal liability and the risk of disqualification.

  • Each director must ensure that their actions are within the powers granted to them by the company’s constitution and are for a proper purpose. Whilst time limits for certain administrative matters have been temporarily extended under recent legislation and certain requirements have been relaxed to enable more flexibility in the holding of general meetings, this will not extend any time limited authorities granted to directors.
  • Each director must act in a way that they consider will promote the success of the company for the benefits of its members as a whole. The interests of various stakeholders must be considered and, most importantly, if a company’s solvency is in question the emphasis of the duty changes so that the interests of its creditors become of paramount importance. Historically, success and benefit have been judged against longer term time horizons, but directors now have to balance success in the longer term against addressing any imminent threat posed to their business by Covid-19. This makes navigation through competing stakeholder interests even more difficult and brings into play the judgment and skill of directors.
  • Each director must exercise independent judgment, not submitting to the will of others or acting in a way which restricts the board’s future decisions. Importantly, directors may rely on advice, provided that they exercise their own judgment in deciding whether or not to follow the advice.
  • Each director must exercise the reasonable care, skill and diligence which would be exercised by a reasonably diligent person with both (a) the knowledge skill and experience reasonably expected of a person in their position (an objective test), and (b) their actual knowledge, skill and experience (a subjective test). In satisfying this duty, directors should not forget the requirement to act diligently. They need to remain informed about their company’s affairs, which is of particular importance when circumstances are so fast moving and, while relying on the expertise and experience of others, or delegating sensibly, they must not abrogate their own responsibility.
  • Each director must avoid conflicts of interest. Situations that could lead to conflicts should be avoided (or properly authorised), rather than simply managed once they exist. 
  • Director must not accept benefits from third parties.
  • Each director must declare their interest in proposed transactions or arrangements with the company. The declaration should be made, where possible, before time and, to the extent not done, it is backed by an obligation on each director to declare their interest in any existing transactions or arrangements entered into by the company.

Practical steps

COVID-19 raises a number of specific risks for directors, and they will mostly test compliance with the duties to promote the success of the company and to exercise judgment, skill, care and diligence. Additional duties and obligations which exist under a range of other legislation, such as health and safety, add further complexity to decisions facing directors in these uncertain times. There are, however, practical steps that all companies can take which will help directors comply with their duties and additionally mitigate issues should concerns about solvency arise.

  • Hold regular (virtual) board meetings and ensure that decisions are properly justified and a detailed record is kept. That a decision is wrong in hindsight does not necessarily mean that it was taken wrongfully if it can be shown that it was made at the time with reasonable justification and after careful consideration of relevant factors.
  • As decisions are made quickly and under pressure, adopt robust procedures to identify circumstances in which duties around conflicts of interest may be breached.
  • Keep the whole business under review. Circumstances can change quickly, and decision making must keep pace.
  • Ensure that the board receives and acts on up to date financial information.
  • Take professional advice and do so at an early stage if the company is struggling. Courts are more sympathetic to directors who have acted honestly, reasonably and sensibly, which includes taking appropriate professional advice to minimise loss to creditors.

Solvency concerns

The knife edge on which COVID-19 has put many companies’ finances raises further complication for directors.

  • One piece of good news for directors is that the recent Corporate Insolvency and Governance Act 2020 has, among other things, temporarily suspended the offence of wrongful trading (with retrospective effect from 1 March 2020) until 30 September 2020. Directors may therefore continue trading distressed companies (in the hope that they can survive the current crisis) without the risk of personal liability, even when there is little clarity about the future prospects of the company avoiding insolvency. In usual circumstances directors can be personally liable for wrongful trading if their companies continue trading beyond a time at which there is no reasonable prospect of the company avoiding insolvency.
  • Notwithstanding the suspension of wrongful trading:
    • solvency concerns bring into play a number of different offences, including fraudulent trading, which remain in force and for which directors can be personally liable;
    • directors must still comply with their statutory duties. However (as we have previously explained in 'Has coronavirus caused distress to your business?') when a company starts heading towards insolvency, rather than considering what will promote the success of the company for the benefit of its members (i.e. what is best for the members), directors must consider what the consequences of their actions will be for the company’s creditors. Determining what is best for a company’s creditors is a notoriously difficult path for directors to tread.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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