DIRECTORS’ DUTIES AND COVID-19

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Being a company director or secretary in the current uncertain climate is particularly difficult. The COVID-19 crisis has presented a number of challenges and, as the corporate world reels from challenges which seemingly develop overnight, directors are no doubt faced with unpredictable circumstances to which it is difficult to respond effectively.

Wrongful trading

There will undoubtedly be a number of directors who are concerned about the solvency and cash-flow of their company. Associated with this is the duty placed on directors to ensure that their company is not continuing to trade whilst insolvent (known as wrongful trading). Wrongful trading is where a director knew or ought to have known at some point before winding up their company that there was no reasonable prospect that the company would avoid insolvency.

Where a director continues to trade despite there being no reasonable prospect that their company will avoid insolvency, the director can be held personally liable to contribute to the company’s assets. This creates a significant problem as COVID-19 has had such an unprecedented effect on the ability to continue trading that it is near impossible to determine when a company has no reasonable prospect of recovery.

Unfortunately, it is an inevitable consequence that some companies will run into financial difficulties in the current climate due to imposed lockdowns and wavering consumer confidence. This increased uncertainty has been met with calls for a temporary suspension or amendment to be made to wrongful trading laws in order to protect directors whilst they are navigating these difficult waters.

In an announcement that will be welcomed by directors, the Government announced new legislation in its 28 March 2020 Press Conference, which would be introduced as soon as possible and apply retrospectively from 1 March 2020, to suspend wrongful trading laws for a period of three months. Such suspension removes the threat of directors incurring personal liability whilst trading during the pandemic.

The details of the proposed legislation are yet to be released, but it is hoped it will provide some much needed clarity for directors around the discharge of their duties, and provide some much needed reassurance and breathing space for companies to continue trading where possible.

Statutory Duties

In the same Press Conference, it was confirmed that all other “checks and balances” that help to ensure directors fulfil their legal duties properly will remain in force. Directors must therefore continue to act in accordance with their statutory duties, which are most notably set out  in section 170-177 of the Companies Act 2006.

Directors operating in the UK will be very familiar with these statutory duties. The pandemic has increased the importance of the following two duties:

  • Section 172 (which requires directors to act in good faith to promote the company’s success); and
  • Section 174 (which obliges directors to make reasonable, skilled, and diligent decisions regarding the company and its future).

COVID-19 has injected extreme uncertainty into 2020 which will make it difficult for directors to rely on market predictions when making strategic company decisions. Reasonableness and good faith therefore become more important: when making decisions during this period, directors should show that they acted with the best intentions with the best information available at the time the decision was made.

Filing duties

Companies are subject to a number of filing duties and the Government has additionally acknowledged that some flexibility to otherwise strict deadlines for filing will be needed during this pandemic.

Although directors should continue to ensure all filing duties are met where possible, they can apply for a three-month extension in relation to the filing of annual accounts at Companies House where such filings are delayed due to COVID-19 (effective from 25 March 2020). Applications for extension can be made through the online system but must be made before the company’s filing deadline.

Companies House is also currently developing a service to allow directors and company secretaries to upload any documents required for filing which have previously not accepted through online filing. We are awaiting an update on the development of this system.

Practical Steps for Directors

There is no denying that these are very difficult times and although the measures announced by Government provide some flexibility, the prospect that claims may be brought against directors due to their activities during the pandemic period has not been entirely extinguished.

Sunnier times will come but when, and whether the economy “bounces back” with aggression, is impossible to predict. In normal times, if a director continues trading regardless of a dire financial outlook they could be liable for wrongful trading. But these are not normal times and the Government has acknowledged such laws need to be adjusted accordingly. While we await the detail of legislation, and in order to best protect themselves and the companies they operate, directors should:

  • Hold (virtual) meetings as regularly as possible to consider the company’s financial position, supply chain, trading position and general outlook.
  • Ensure that any decisions are made carefully, in good faith and in line with their usual duties.
  • Ensure that detailed minutes are kept of each meeting and the items considered.
  • Ensure deadlines for filing reports and other documents are kept to as closely as possible.
  • Ensure staff are well trained on cyber issues; there has been a significant increase in phishing and targeted cyber attacks seeking to exploit weaker remote IT systems.
  • Keep up to date with government guidance to ensure all decisions are taken and supported with information which is as recent and accurate as possible. Where possible, document these updates when taking decisions in relation to the company.

The steps listed in this article are not exhaustive. If you have any queries about how you can meet your duties during this period, please contact pcollins@sharpepritchard.co.uk and rcopeland@sharpepritchard.co.uk.

This article is for general awareness only and does not constitute legal or professional advice. Law and guidance relating to the COVID19 pandemic is continually being updated and the law may have changed since this page was first published. If you would like further advice and assistance in relation to any issues raised, please contact us today by telephone or email  covidhelp@sharpepritchard.co.uk.

Posted in Anna Moon, Coronavirus (COVID-19), Ryan Copeland.