The current Covid-19 situation has been very sobering for many directors and many have re-visited their duties to ensure they are not inadvertently exposing themselves through breaching these duties as a result of decisions being made to deal with the impact of Covid-19 on their respective businesses.
Under normal circumstances, the duties of a director are to the shareholders, however where the continued solvency of a company is in doubt, the duties of the directors switch from promoting the success of the company to acting in the best interest of creditors.
If a company’s continued solvency is in question, directors do need to take independent advice, as wrongful trading could see a director personally liable under the Insolvency Act 1986.
The current impact of Covid-19 has likely forced many companies to cross this line, often inadvertently.
The current situation has threatened the very existence of a vast number of companies and to provide directors with some protection against decisions taken in these times, the government has announced that it is going to relax the rules on wrongful trading for a period of three months commencing from the 1 March 2020.
Just a reminder that wrongful trading occurs when a director knew, or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent administration were it to continue trading.
The proposed relaxation of the wrongful trading rules will be welcome to most company directors, but a relaxation in this area does not mean that directors are not still bound by their other duties and there is no protection against negligent or fraudulent trading and the director disqualification regime is still in place.
While the current situation persists, it is crucial that no director “puts their head in the sand” and engages with regular dialogue with other directors, and where appropriate, advisers.
As the situation is so dynamic it is imperative to ensure that the board has access to robust and current financial information to assist in decision making and that the board require management to report on the company’s performance against any banking / investor covenants, and that there are clear “triggers” to address a worsening in each company’s financial position.
Simon Walsh is a partner at Oury Clark Solicitors and Georgia Fisher is a partner at Oury Clark insolvency