Director Duties During the COVID-19 Pandemic

The Government has announced plans to suspend the wrongful trading provisions under the Insolvency Act 1986 for a period of three months from 1 March 2020 (see here for more information).

Despite the suspension, the Government has stressed the need for businesses to continue trading wherever possible and has announced funding and reliefs for struggling business during this pandemic, including providing guarantees of liabilities, payment holidays on mortgage payments and granting relief from payment of business rates.

Directors’ Duties Continue to Apply

The recent suspension of wrongful trading is designed to ease the pressure on directors running their businesses by removing the spectre of personal liability for continuing to trade whilst the business may technically be insolvent. Notwithstanding this, directors are still expected to promote the success of the company for the benefit of its shareholders.

Chapter 2 of the Companies Act 2006 sets out duties owed by directors to a company including:

  • 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;
  • a duty to promote the success of the company for the benefit of the members;
  • a duty to exercise reasonable care, skill and diligence;
  • a duty to exercise independent judgment;
  • a duty to avoid conflicts of interest;
  • a duty not to accept benefits from third parties; and
  • a duty to declare to the other directors any interest that a director has in any proposed transaction or arrangement with the company.

Solvency vs Insolvency

When a company is insolvent or likely to become insolvent the directors’ duties change and they will be required to act in the best interests of the company’s creditors. These duties include avoiding preferential treatment towards a particular creditor (for example repaying a director’s loan), transferring the company’s assets at an undervalue and giving a connected party security over company assets due to historic reasons.

These duties are likely to remain unchanged by the proposed insolvency law reforms and it is important to note that the suspension of wrongful trading will not suspend other claims which can render directors personally liable such as:

  • Fraudulent Trading: if a company continues to trade with the intent to defraud its creditors, the directors (or any other person knowingly party to the carrying on of the business in such manner) can be made personally liable to contribute to the company’s assets;
  • Misfeasance: a director may be subject to proceedings brought by a liquidator for breach of fiduciary misapplication of company property;
  • Director Disqualification: A director may find himself disqualified if proceedings are brought by the Secretary of State for Business, Innovation & Skills or, usually in compulsory winding-up cases, by the Official Receiver at the direction of the Secretary of State; and
  • Breach of duties set out in the Companies Act 2006.

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.

Extension of Time for Filing Annual Accounts

The Government has announced that companies affected by COVID-19 can apply for a 3 month extension for the filing of their accounts by making an application online which will be automatically and immediately approved if the reasons are COVID-19 related and if the deadline to file annual accounts has not yet passed.

This is helpful for directors as it may allow them more time to agree terms with their existing lenders and/or take advantage of the new funding schemes available to the companies before finalising their accounts.

Instruct Specialist Winding Up Petition Solicitors

We are a specialist City of London law firm made up of Solicitors & Barristers and based in the Middle Temple Inns of Court adjacent to the Royal Courts of Justice.  We are experts in dealing with matters surrounding insolvency in particular issues.  Our team have unparalleled experience at serving statutory demands, negotiating with debtors/creditors, setting aside statutory demands and both issuing and defending winding up petitions vigorously at the Royal Courts of Justice (Rolls Building), or the relevant High Court District Registry or County Court with jurisdiction under the Insolvency Rules.

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