COVID-19 and Financial Distress: Directors’ duties

As a result of COVID-19, many companies are facing financial difficulties and distress. How directors respond will depend on the nature of the business, the current financial status and what assistance lenders and the government provide to these companies. Directors should remain aware of their duties to the company and under the Companies Act 2006, particularly concerning wrongful trading. We highlight these duties in detail below.

Directors’ compliance with statutory obligations

The government has recognised the imminent threat to the solvency of many businesses but we are yet to see the processes in place for accessing funds and payment mechanisms. During this time, directors will be desperately trying to operate businesses, assess cashflow whilst also complying with statutory obligations and potential liabilities in the event of a breach. The Companies Act 2006 sets out duties owed by directors to a company including:

  1. a duty to act in accordance with the constitution of the company and to use powers only for the purposes for which they were conferred;
  2. a duty to promote the success of the company for the benefit of the members;
  3. a duty to exercise reasonable care, skill and diligence ;
  4. a duty to exercise independent judgment;
  5. a duty to avoid conflicts of interest;
  6. a duty not to accept benefits from third parties; and
  7. a duty to declare to the other directors any interest that a director has in any proposed transaction or arrangement with the company.

Directors and boards of companies have a duty to promote the success of the company and act in the best interests of the company which will include taking into account:

  • Profitability of the company;
  • Well being and interests of the company’s staff including all employees, workers and contractors;
  • Interests of the shareholders and any potential action taken by them;
  • Relationships with the company’s suppliers and customers;
  • The reputation of the company; and
  • The need to act fairly as between the members of the company.

The financial status of the company and the duty of the directors to act in the best interests of the company will be paramount at the moment however directors should consider the likely consequences of any decision in the long term.

Wrongful trading

Directors should be aware of the consequences of failing to comply with their statutory duties.

A company can continue to trade in times of financial uncertainty if the company has realistic options to pursue which will result in any insolvency process being avoided. These options may include locating alternative suppliers, tightening credit terms and pursuing debt recovery.

The Insolvency Act 1986 provides that a director can be personally liable for the losses of a company where they continue to trade in circumstances where there was no realistic prospect of avoiding a formal insolvency event, such as liquidation or administration or even a winding up petition.

Disqualification of Directors

The court can disqualify a director for many reasons, for example:

  • certain criminal offences connected with the Companies Act legislation;
  • wrongful trading (such as trading while insolvent;
  • failure to comply with filing requirements under the Companies Act Legislation; and
  • unfit conduct in insolvent companies.

Potential insurance claims

Company directors, or the company itself, will usually hold directors’ and officers’ liability (D&O) insurance to indemnify themselves against losses relating to regulatory investigations by a financial regulator or a fall in value of the company.

Companies and its directors may face claims relating to employment liability, cybersecurity liability and compensation claims following exposure to coronavirus-related disruption. Companies should review their existing cover and consider discussing with their insurers or brokers any need for bespoke cover on specific new exposures.

Steps to be taken by directors

  • Stay up to date with government guidance on COVID-19 and any measures introduced for companies.
  • All directors of the company should have access to the relevant financial information to be able to make collaborative, informed decisions.
  • It may be helpful for directors to meet regularly (via teleconferencing or video conferencing) to discuss the status of the business.
  • Look out for and effectively manage contractual, operational and insolvency risks in the business.
  • Directors should ensure their decisions and the factors considered in their decision making are well documented i.e. board minutes and resolutions even where meetings have been held over video conferencing due to present circumstances.
  • It is important to also seek legal advice from professionals to assist you throughout this time and in any decisions concerning the company.
  • Seek advice from accountants, legal advisers and insurers in light of the present circumstances.

City of London Commercial Solicitors

Our leading Commerical Solicitors and Barristers provide bespoke legal advice including on directors duties, director disputes, corporate insolvency. We invite you to contact us so one of our legal team can assess your dispute.

We can subsequently provide urgent help, advice or representation from our expert team of leading commercial lawyers. We regularly advise companies on a range of legal and commercial matters. Call or email us to start the process of instructing us. Please note we do not offer any financial or tax planning advice.

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