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Coronavirus FAQs for Companies & Directors

We've put together answers to some of the questions you might have in light of current circumstances. We will continue to build out the Q&A library as updates arise so bookmark the page and reach out if you have any questions.

Most contracts (other than deeds) only require one director to sign on behalf of a company, so it would be business as usual if you (as a director) wish to sign contracts on behalf of a company.

However if the contract is being executed as a deed, two directors, a director and company secretary or a director in the presence of a witness will be required to sign on behalf of the company, and in order to form a valid counterpart, each full signature block must be executed as the same physical copy. Therefore, both individuals would ordinarily have to sign the same copy of the deed in order for it to be valid. As this may prove to be problematic given Covid 19, an alternative is for one director to sign, scan that signature page to the other director/company secretary, who then signs adjacent to his/her name on the scanned copy and returns the same to the first director. Whilst not perfect, the courts have upheld this as valid signature of a deed.

The above work-around does not apply if the director’s signature is being witnessed, and you will need to ensure that the witness is physically present when the director signs (i.e. the director and witness do need to sign the same copy of the deed).

There are two ways in which contracts may be signed without the parties having to meet face to face:

  • wet ink counterparts; and
  • E-Signing.

Counterparts

Signing in counterpart simply means that each party to the agreement may sign their own copy of the agreement. Once all of the separate signatures have been delivered to the other parties to the agreement, all of the counterpart signatures shall constitute one agreement.

In order to ensure that legal documents can be signed in counterpart, it is important to ensure that a counterparts clause is inserted into the relevant contract. This is the case under both Scots and English Law, however, it should be noted that the requirements differ in each jurisdiction.

Once it has been established that the contract you are signing has adequate provision for signing in counterpart, you can simply print, sign, scan and deliver your signature to the other parties of the agreement (or to your solicitor).

E-Signing

The legal framework around electronic signing is still developing, however, services such as DocuSign are becoming increasingly popular as such services bypass both the need to meet face-to-face and to print and sign in wet ink. The law is still unclear in regards to e-signing of deeds and legal advice should be taken before signing deeds electronically.

In these unprecedented times, it is important to continue regular communications with not just your staff but also your shareholders who will no doubt want to be informed about how your business, and their investment, is impacted. The same goes for the Board, who will probably meet more regularly to make necessary decisions. If your company’s Articles of Association (Articles) only provide for physical meetings, there are still alternative ways for the Board to meet. For example, unless the Articles specifically exclude it, the directors can unanimously pass written resolutions. Boards may usually act informally if they are unanimous.

Similarly, given the limited alternatives (other than a video or telephone conference), it would seem unlikely that shareholders would disagree with holding a shareholder meeting remotely. One alternative to arrange for remote meetings is to vary the Articles by passing a written shareholder resolution. A 75% shareholder majority is required to pass such a resolution. If amending the Articles seems overkill given only one provision would be amended, the same majority of shareholders could agree to meet remotely. If 75% majority can agree to meet remotely, their agreement would in essence have the same effect as varying the Articles even if this does not need to be done. If the time it would take to seek the shareholders permission is too valuable to be lost waiting, the shareholders could simply be informed of the alternative venue. The risk is that one (or several) shareholders complain. Shareholders have means under law to pursue action against the company, however, it would be unusual for them to disagree with a remote meeting venue, especially when its purpose is to involve the shareholders to make swift decisions for the benefit of the company.

The investor with observer rights can still exercise its observer rights via a video conference. Assuming the investor with such observer rights normally sends a representative to observe in meetings, that investor’s consent should be obtained before effecting this practical change. Again, given the limited alternatives, it would be unusual for that investor to reject the proposal.

Given the unusual circumstances, and the lack of options, it would be unusual for a Board or a shareholder not to consent to the alternative options suggested above.

In these unprecedented times, it is important to consider one’s contractual position and this can vary from pre-contract negotiations in which case it is likely that no contractual commitments have been entered into. In this situation, a letter of intent or an NDA may be in place which will state how confidential information should be treated and whether it needs to be returned or destroyed. These provisions should be considered.

Contracts that have been entered into and under which each party’s obligations (for example, to deliver goods or supplies) are ongoing, the parties should be clear on exactly what these obligations are and how they can potentially be varied if they can no longer be fulfilled.

Force Majeur clauses are bespoke to each contract, there is no universal definition for it. Therefore, if a contract includes a Force Majeur clause and that clause includes pandemics, that clause can be enforced in these circumstances. It is important to note the requirements for triggering such a clause such as the notice provisions and providing evidence that shows why you are unable to fulfil your contractual obligations.

If a contract does not include a Force Majeur clause, alternative ways to terminate the agreement should be considered. Can the contract be terminated in the normal way without the notice period having a further damaging economic impact on the business?

Assuming that contracting parties must be in regular contact in these unusual circumstances, perhaps there is a way to vary the contract by written agreement to make it work for the parties. If there is concern that a breach of contract claim may be brought, mitigating the circumstances as much as possible would add to the defending party’s case.

If not being able to fulfil the contract does result in a breach of contract, although this is would be an unwanted scenario for either party, the potential claiming party must consider what it would gain from bringing a breach of contract claim. Financial compensation may not be forthcoming if the breaching party is in severe financial difficulty and the courts may show sympathy to the breaching party given the unexpected and unprecedented circumstances.

 

Unfortunately, Heads of Terms are often designed to be non-binding, except in relation to certain clauses such as exclusivity, confidentiality and data protection. If any clause is intended to be legally binding, this would need to be expressly stated.

This means that, although morally your investor should be obliged to continue with the deal, legally, neither party is bound to complete.

Handy Tip: To protect yourself, consider including a binding break-fee clause into the HoT to prevent your investor from pulling out of the deal.

Where employees own shares or options in the company, and the company takes the unfortunate decision to make that employee redundant, what happens to those shares/options? The answer: it depends on the terms of the company’s articles of association or shareholders’ agreement.

What you will find is that in most cases, where an employee is made redundant, he/she will be classed as a “Good Leaver” (ie: they left the business for no fault of their own).

As a “Good Leaver”, the employee usually has the choice to either:

  1. Sell all (or a portion) of your options/shares at “Fair Value” to the other shareholders or the company; or
  2. Keep all (or a portion) of your shares/options.

It is possible (and advisable to draft this into the company’s articles of association from the outset) that the company has the discretion to make the above decision for the employee. There are various reasons why the company would want to maintain this control; does it have sufficient funds to buyout the Good Leaver at the time of redundancy, a redundant employee shareholder may be disruptive to the long term plans of the business and be a blocker for future investors.

 

In this time of economic uncertainty, we will begin to see businesses struggle to pay their employees and debtors. Directors will need to make difficult decisions over the coming weeks to keep their business trading. With this in mind, they will need to ensure that these decisions adhere to the general duties that are imposed on all directors of UK limited companies.

Salary Subsidy

Over the past few days the government has announced certain measures to ensure businesses are supported. On the 20th of March 2020 the Chancellor Rishi Sunak announced a new Coronavirus Job Retention Scheme which aims to protect jobs by paying employees on behalf of their employers. The salary subsidy will be paid through a new HMRC system and will reimburse 80% of workers wage costs, up to a cap of £2,500 per month. This scheme is due to initially run for the next 3 months but it will be extended if necessary.

To take advantage of this scheme, businesses will need to contact HMRC to apply for the salary contributions. The government are currently working on a new online portal which will handle enquiries but this is not due to go live until April. It is important to note that not all employees will be eligible for the contribution. The Scheme will apply to employees who have been designated by their employers as "furloughed employees". This means that the employee is still employed but not working.

This scheme is something that directors should consider when formulating possible plans to streamline their business in order to retain talent and keep costs down.

Wrongful Trading

In these tough economic times, we will begin to see businesses struggle to keep the lights on. What should directors consider when a company's liabilities begin to outweigh the value of their assets?

Understandably, directors are accustomed to the concept of putting their shareholders first. It is often unknown to directors that at the point a company slips into a state of insolvency there is a fundamental shift in the responsibility of a director. As soon as a director becomes aware that the company is or is likely to become insolvent the focus shifts from acting in the best interest of the shareholders to the creditors. The transition from the focus on shareholders to creditors can be something of a grey area and in some cases, it is difficult for a director to know when the appropriate time is to make the shift.

Broadly speaking, a business becomes insolvent when:

  • It can no longer afford to pay its debts when they become due (debts greater than a total of £750);
  • Its assets no longer cover its liabilities;
  • It is subject to administration, liquidation or it is in danger of being wound up.

Section 214 of the Insolvency Act 1986 provides certain rules around wrongful trading when a company is insolvent. If a director fails to adhere to such rules then they could be accused of wrongful trading and held personally liable for company debts. While wrongful trading is only a civil offence, fraudulent trading is a criminal offence. The main issue is the intent. To prove fraudulent trading, it must be shown that the directors willingly and knowingly carried on trading. We have highlighted below several points which should be considered by directors in an insolvency situation:

  • Carrying on trading with no intention of repaying
    You must not continue to enter into new contracts and trade when you know you have no reasonable prospect of repaying your creditors.
  • Attempting to repay debts through fraudulent means
    If you try to repay debts through dishonest transactions you cannot fulfil or using misleading information to obtain loans then you could be convicted of fraudulent trading. Unlike wrongful trading, fraudulent trading is a criminal offence that could lead to a custodial sentence as well as personal liability for company debts.
  • Selling assets for less than market value
    You might think that selling assets at a reduced price to raise funds quickly and repay your debts would be an accepted practice. However, it could lead to your creditors receiving less of the money they are owed on liquidation. The court can reverse such transactions and order you to refund the proceeds of the sale.
  • Repaying some creditors and not others
    Company directors are obliged to act in the best interests of the creditors as a whole. Making payments to some creditors and not others is called showing ‘preference’. As an example, you may choose to repay a personally guaranteed loan or pay a supplier you know personally. The court can reverse such payments and order the creditor to refund the money.
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