COVID-19 and your duties as a director

As this is a fast moving topic, please note that this article is current as at 26/03/20. For further information, please contact Dino Paganuzzi, Darren Bradshaw and Laura Smith.

The government has announced unprecedented measures to assist certain businesses through the inevitable difficulties they will face as a consequence of measures being adopted to slow the rate of infection amongst the population of COVID-19. These measures include support with time to pay arrangements for tax, business rates holidays for some retail, hospitality and leisure businesses and business interruption loans for small and medium businesses. In addition, the Bank of England has announced a new lending facility to provide a quick and cost effective way to raise working capital through the purchase of short-term debt for “strong” businesses.

In certain circumstances, the merits of a business adopting certain of these measures will be clear. Directors of companies are, however, reminded of their duties to act in the interests of the company. What that looks like in practice will depend on the financial position of the company.

Background

It has long been established that on the insolvency of a company, the interests of the creditors intrude upon those of shareholders. The consequence of this is that in such circumstances directors should have regard to the interests of the creditors of a company.

Recently, in BTI 2014 LLP v Sequana SA [2019], the Court of Appeal grappled with the question of when this duty to creditors arose. It considered a number of different possibilities and scenarios, finally settling on the view that the duty arises “when the directors know or should know that the company is or is likely to become insolvent”. In this context, the Court said that “likely” means “probable”. The Court also agreed with the rejection by the lower court of an argument that this meant “real, as opposed to remote, risk of insolvency”, which it said was a lower threshold.

Directors could be held personally liable for any loss to the company as a result of the breach of such a duty. In addition, they could be held personally liable in the event that a director knew or ought to have known that a company could not avoid going into insolvent liquidation or insolvent administration, or when certain transactions are carried out which constitute preferences or transactions at undervalue under the Insolvency Act 1986. Recent case law also reminds us that directors need to continue to consider the interests of creditors when involved in a pre-packed sale and even beyond the appointment of an administrator or liquidator.

Comment

Whilst communication may currently be more difficult as a result of social distancing, the following are important considerations in the current climate:

• Notwithstanding the offer of loans from the government and Bank of England, it will still be necessary for you to consider whether taking such a loan complies with your duties to the company, which as has been seen above, could mean considering the interests of creditors in taking a loan which will effectively add to the number of the company’s creditors.
• It will be necessary to have up to date knowledge of the financial predicament of the company, which may involve the preparation of management accounts on a more regular basis than usual.
• A review should take place of factors which may affect turnover and profit, for example, supply chain issues, reduced demand, problems with logistics.
• Directors should consider holding regular meetings to review the management accounts and the factors mentioned above, and consider whether professional advice is required, in particular where it looks likely that the company will become insolvent.
• Directors should remember that they will be judged by the standard of a reasonable director, in addition to a director with the skills which they possess. This may be particularly difficult given the timescale of the current crisis is unknown. However, just because this is the case does not necessarily mean that the necessary thresholds will be met.
• All transactions should be scrutinised to ensure that they comply with the directors’ duties to the company.

You may be a director of a company which is approached by a supplier seeking to vary its terms with you, a customer seeking revised payment terms or a tenant seeking a rent reduction during these unprecedented times. Your duties as a director are the same as those described above. Any such agreement should only be reached after careful consideration of your duties to the company, which may include having regard to the company’s creditors if the company is likely to become insolvent.