Christian Hunt, partner at Bevan Brittan LLP
The financial impact of Covid-19 on business has already proved highly damaging, and whilst many companies will withstand its impact, others – particularly in sectors including manufacturing, retail and leisure – are now facing substantial threats.
Directors are being forced into making critical choices about keeping the organisation trading and in business -and making similarly difficult decisions about management, governance, employees and administration.
The Government is providing emergency funding to assist companies through the Coronavirus Job Retention Scheme, business rates support, deferred tax payments and the Coronavirus Business Interruption Loan Scheme (‘CBILS’).
But at the same time, it’s imperative that directors carefully consider the scope of their statutory and fiduciary duties – duties that they will still be required to discharge during the Covid-19 outbreak.
- A duty to act in good faith to promote the success of the company. Under section 172 of the Companies Act 2006, directors must act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole. Factors include the likely consequences of any long term decisions, the interests of the company’s employees and the need to foster the company’s business relationships with its suppliers and customers
- Their duty to exercise reasonable care, skill and diligence. In meeting requirements of the Companies Act, directors need to both exercise care and skill that may be reasonably expected of a person carrying out such functions by a director of the company, and also exercise such care and skill having regard to the general knowledge, skill and experience that the director actually has
When a company is trading on a solvent basis, its directors owe their duties to the benefit of its members. However, when a company’s financial position deteriorates to the point where its solvency is in doubt, its directors should re-focus to take account of the company’s creditor position. In doing so, the directors must seek to protect the value of the company assets and minimise losses to creditors as far as possible. Failure to do so, could result in a breach of the relevant directors’ statutory duty, for which directors may become personally liable, whether in the form of wrongful, fraudulent trading or director disqualification proceedings.
How can directors best address the risk?
- Ongoing review of the financial position – directors should consider whether the provision of more regular financial and management information is required in order for the board to comprehensively monitor its funding facilities, cash flow position, its liabilities and asset values
- Keep a detailed record of all board meetings, the decisions taken along with the rationale behind them
- Seek appropriate legal and financial professional advice and engage with the company’s funders, key suppliers and customers, so that trading pressures can be managed effectively
- Regular communication and discussions between directors on the trading position of the company
- Assess if the company has appropriate business interruption insurance in place under which a claim can be made?
Whilst the Government has announced a number of support packages, directors need to act responsibly in considering their availability, eligibility, and suitability in supporting the business in the short to medium term along with the consequences of taking such support. In addition to careful consideration of such specific support, directors need to consider how they can engage with key creditors and stakeholders. Robust and strong decision making by a well informed and prudent board of directors will ultimately stand the company and its shareholders in good stead in these unprecedented times.