Directors Duties and Coronavirus
Updated: Apr 24, 2020
Directors have the following fiduciary duties to their company under the Companies Act 2006:
· To act within their powers.
· To promote the success of the company.
· To exercise independent judgment.
· To avoid conflicts of interest.
· Not to accept benefits from third parties.
· To declare an interest in a proposed transaction or arrangement.
Directors’ duties and Coronavirus
Our practical guidance in these challenging times is to focus on good corporate governance, keep good records and seek professional advice early if your company is struggling.
The pandemic is not an excuse for directors of a company to breach their common law duties and statutory obligations under the Companies Act. As a director all your business decisions must be made in full cognisance of your duties as a company director.
In this article I will briefly touch on directors’ duties, the current situation in relation to dividend payments and insolvency and the temporary suspension of the wrongful trading provisions by the government on 28 March 2020 suspending the .
Although all the duties are equally binding on a director the duty to promote the success of the company (section 172 CA 2006). is often one which has been much litigated.
Directors making decisions regarding the future of their business particularly in these challenging times should pay attention to this clause.
Section 172 states that a director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (section 172(1)). When doing so, the director is obliged to have regard (amongst other things) to:
· The likely consequences of any decision in the long term.
· The interests of the employees of the company .
· The need to foster the company’s business relationships with suppliers, customers and others.
· The impact of the company’s operations on the community and the environment.
· The desirability of the company maintaining a reputation for high standards of business conduct.
· The need to act fairly as between the members of the company.
The list of factors is not exhaustive and directors should have regard to other matters relevant to the duty to promote the success of their company. Business decisions on for example business strategy and tactics are for the directors and are not subject to question by the courts as long as the directors were acting in good faith.
The Section 172 duty is subject to any legislation that requires directors to consider or act in the interests of the company’s creditors in certain circumstances.
So if a company is insolvent the duty owed by the directors to its shareholders is varied to a duty to have regard to the interests of the creditors of the company. So if your business is nearing insolvency or is at risk of insolvency it is essential to seek professional advice eg from your accountant, insolvency expert or a lawyer.
Dividends and You
As you would have seen in the newspapers since the coronavirus pandemic several UK listed companies have cut, suspended or cancelled their dividend payments to their shareholders . This has been done to safeguard their balance sheets and to ensure that if they need to obtain financial assistance in future, they can show that they have been prudent in this difficult economic period.
The payment of dividends and how it should be treated is not just for the listed companies. As a private company director, you should be reviewing and considering all your company obligations and your company’s obligations to pay a dividend to your shareholders.
The general rule is that for a company to lawfully pay a dividend, it must have sufficient distributable profits in its company accounts. Before declaring a dividend the directors must also have regard to the company’s articles of association, legislation, as well as their fiduciary duties including the duty to promote the success of the company, act within their powers and exercise reasonable care and diligence.
In view of recent economic developments, it is very clear that the most recent accounts of many businesses’ will not evidence their present financial status. As a director you should consider the situation and evaluate whether your business’s interests are best served by retaining distributable profits. If that is the case and if you have already declared an interim or final dividend payment you can cancel or delay payment of the dividend. Do check your articles of association and contact us if you require any help.
Insolvency update: offence of wrongful trading
Where a company is in financial difficulty and a director or the directors of a company are of the view that the company has no reasonable prospect of avoiding insolvency or administration they are obliged to take every reasonable step to minimise potential loss to the company’s creditors and cease trading. In this case their duties to the shareholders are superseded by their duties to the company’s creditors.
This is a very strict obligation as under the law as it stands directors can be personally held liable to contribute to a company’s assets where a company has gone into insolvent administration or liquidation, and it appears to a court that a director has failed to comply with this duty, and has continued trading. If found liable the court can personally ask the director to make a contribution to the company’s assets as the court thinks proper.
In light of the recent economic problems caused by the pandemic a lot of business directors have been very worried about whether they could be held liable for wrongful trading as making a judgment about wrongful trading liability in these unprecedented times is extremely challenging. For example a business suffering from cash flow problems at the current time may be insolvent now but with the government support and other support initiatives being announced on a daily basis it is conceivable that many such businesses may be rescued from insolvent liquidation even if this would not have happened in pre-coronavirus times. Further the steps that a business might take as “reasonable steps” to mitigate losses to creditors might be different today – for instance the government has been asking businesses to avoid lay-offs and redundancies when in other times, redundancies and lay-offs might be considered “reasonable steps” by businesses to minimise losses and stave off insolvency.
On 28 March 2020 the government announced that the wrongful trading rules would be temporarily suspended to remove the threat of directors incurring personal liability for wrongful trading during the COVID 19 pandemic. This measure is in addition to other government initiatives aimed at providing UK businesses with financial aid and is to be retrospectively applied from 1 March 2020.
The aim is to assist businesses to continue trading, by providing them with extra time and space to recover and is an important recognition of the immense pressure directors are under.
However, as a director you should note that the suspension of wrongful trading does not mean that directors can ignore their duties. There are still risks of personal liability. You should note the following:
· As a director you are still bound by your common law and statutory duties to the company. So, if your company is teetering on the brink of insolvency you are under an obligation to prioritise our duties to your creditors rather than shareholders when carrying out those duties.
· The government has not announced any changes to the rules dealing with avoidance of transactions. Therefore, in small and medium- sized businesses where there is an overlap between shareholders and directors if the company cannot avoid administration or liquidation any transactions that you have entered into with the company over the last two years are likely to be scrutinised by the administrator or liquidator and you may be required to pay money back to the company.
.All other checks and balances to ensure directors continue to fulfil their legal duties and obligations e.g the fraudulent trading and misfeasance rules still remain in place.
We are taking calls daily from clients in these uncertain times.
If you require advice on the current Coronavirus situation and how this will impact you and your business, please contact us. We are specialist Business and Commercial Solicitors based in Bedford and operate nationally.
If you would like to talk through the consequences for you, call our Coronavirus Helpline on 01234 938089 or e-mail us at email@example.com and one of our Helpline team member will be in touch.