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New Challenges, Same Responsibilities: Directors' Duties in the age of COVID-19

The last few months have brought great turmoil and uncertainty to business across the United Kingdom. In times where directors are rightly concerned with the future, or even survival, of their company it is understandable that the usual ordinary-course considerations around board decision-making are not are the forefront of the mind. However, now more than ever, directors should be particularly cognisant of the duties of their office, be that to the company, its employees, its shareholders or its creditors.

The risk of breaching these duties becomes increasingly acute as directors are faced with tough decisions and try to navigate the choppy waters of the age of COVID.

The law in (very) brief

Directors have a wide-ranging set of duties which are based on common law and fiduciary duties; statutory duties, such as those set out in the Companies Act 2006 (the "2006 Act"); and the rules and regulations set out in a company's articles of association and other governance documents. These duties apply not just to formally appointed directors but also equally to "shadow" or de facto directors.

Generally a director must always act in the best interests of the company and its shareholders (two things that are not always easily compatible!), but consideration must also be given to the interests of employees and, particularly in an insolvency situation, the Company's creditors.

Sections 171 to 177 of the 2006 Act headline some of the key day-to-day duties of directors:

  • Duty to act within powers (s171)
  • Duty to promote the success of the company (s172)
  • Duty to exercise independent judgement (s173)
  • Duty to exercise reasonable care, skill and diligence (s174)
  • Duty to avoid conflicts of interest (s175)
  • Duty not to accept benefits from third parties (s176)
  • Duty to declare interest in proposed transaction or arrangement (s177)

Breach of a director's duties can have serious personal consequences for that individual including civil or criminal sanctions and disqualification as a director.

Some practical tips

We have set out some practical tips and best practice for directors to help them ensure that they are complying with all their duties. These are equally applicable in normal times as well as during the current COVID pandemic.

  • Seek appropriate legal and financial advice. This should be sought as early as possible, especially in an insolvency situation.
  • Hold regular board meetings (even more than would be usual, especially where developments are fast moving or particularly important to the future prospects of the business) and regularly review and discuss (as a whole board) cashflow and other forecasts.
  • Keep records of all material financial, commercial and operational decisions and the rationale for these. Lots and lots of (detailed) board minutes!
  • Directors should arm themselves with the right and most up-to-date information (the test for a director's personal liability for wrongful trading factors what a director "ought to have known"). This includes latest cash-flow data and management accounts.
  • Engage with creditors, key customers and suppliers. Keep an open dialogue with these groups and it will be easier to manage any issues. Customers and suppliers will likely be feeling the same pain as your business and by working together any risks can be better managed.
  • Check your key contracts. Are there any termination or breach provisions which are at risk of being triggered or might be affected by cashflow or other business interruptions?
  • Keep up to speed on relevant Government guidance and changes to legislation. For the moment there are lots of initiatives supported by the Government to help various types of business weather the current storm.
  • Where a function or task has been delegated beyond the board (e.g. to a committee or finance function), the board should still be aware of all key decisions and take a holistic view as to how these will affect the company and its stakeholders.
  • Check that all necessary business insurances are in place and provide enough coverage for the Company. Director and officer insurance should also be looked at to give the directors as much comfort as possible in their decision making.
  • Be aware of any possible conflicts of interest that might affect members of the board (e.g. in a group of companies does a director sit on the board of more than one group member).
  • Recognise that promoting the success of the company may not require the same actions to be taken as would have otherwise been taken in more stable times or in accordance with a business plan.

Corporate Insolvency and Governance Act 2020

The Corporate Insolvency and Governance Act 2020 (the "2020 Act") came into force on 25 June 2020 after an accelerated journey through Parliament. The 2020 Act was in response to an increasing call from businesses to provide them with some statutory flexibility in light of the catastrophic financial and trading implications of the COVID-19 crisis, especially as many were at significant risk of trading on an insolvent basis as cash-flow and revenue ground to a halt.

In particular, in the context of directors' duties, the 2020 Act makes a number of retrospective changes to the Insolvency Act 1986 for the period from 1 March 2020 to 30 September 2020 (although we expect this to be extended soon). In short, the 2020 Act relieves some of the pressures imposed on directors in a potential wrongful trading situation by removing some of the burden of personal liability usually imposed on directors for wrongful trading, i.e. the courts should "assume that the person [the director] is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period".

It should be noted that this applies only until 30 September 2020 (for the moment, this may be extended) and does not apply to certain excluded companies (e.g. banks, insurance business, and foreign companies). The 2020 Act does not give directors carte blanche to ignore the usual rules around insolvency and wrongful trading nor does it absolve them of any breach of their common law and 2006 Act duties. Fraudulent trading (per the Insolvency Act 1986 and the 2006 Act) remains unaffected and the general duty to act in the best interests of creditors must still be observed.

Whilst the practical risk of trading whilst insolvent has been somewhat mitigated in the short-term by the various Government relief initiatives, as these start to fall-away business may find themselves facing such a situation again.

We will be exploring wrongful trading and insolvency implications in more detail in another blog.

If you or your business would like specific advice on any matters relating to directors' duties then please do feel free to contact calum.hamilton@mbmcommercial.co.uk or another member of the MBM Corporate team.

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