Uncertain times require stong leadership from company directors. We are each adjusting to a new normal of video conferences replacing meetings and realising how much time we previously wasted on travel. But there are also immediate and difficult questions which directors of companies are faced with as the implications of a nationwide lock down continues. In this article we want to ask some of those hard questions so that you can proactively begin to prepare for the coming weeks and months.
Do Director duties apply still?
Yes, these continue even in difficult times. They are outlined in detail in this article but the key ones relate to acting in good faith and in the best interests of the company (section 131) and acting with the care, diligence and skill of a reasonable director (section 137) taking into account:
- the nature of the company;
- the nature of the decision;
- the position of the director; and
- the nature of responsibilities undertaken by him/her.
The other duty which will be getting a lot more attention, if there is the impact on the economy predicted, is section 135 around reckless trading. A director must not agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. This duty is aimed at preventing conduct by the directors which could jeopardise the company’s solvency. Unlike the best interests duty, the directors’ personal opinion as to the company’s ability to continue trading is irrelevant. Instead, a Court is likely to ask: “Was there something in the financial position of the company which would have alerted an ordinary prudent director to the real possibility that continuing to carry on the business of the company would cause serious loss to the creditors?”. In the context of COVID-19 this is going to become a lot more relevant to consider.
Key considerations
As well as making sure you are complying with Director Duties it is important to think widely about all the stakeholders of the company rather than just the shareholders. This includes employees, suppliers, customers – how are each of these groups impacted and what is the flow on effect on the company? You might want to have an action plan regarding:
- Employees: How are they doing? Is clear messaging going out about the status? How can you help reduce stress and anxiety through eg zoom catchups?
- Wage subsidy: Will there be a 30% predicted drop in revenue? If so, explore the subsidy described here.
- Leases: Have you got one? Read this article if so as now may be the time to contact your landlord.
- Bank funding: Talk early with your funder and ensure you know what the position is in relation to any loans you have. Are there any other funding sources to be exploring?
- Shareholders: Is it worth considering raising some more capital from them (depends on unique context of your company as to whether that is an option but extra liquidity might not hurt).
- Contracts: Do any of them have force majeure clauses in them – for your benefit, or not – that might mean these get paused? What impact will that have on your revenue? Have a read of this article for more on this.
- Overseas suppliers/customers: Is there someone overseas that may have issues continuing due to the shut down that will flow on to impact you?Having considered all these factors does it impact on the viability of the company? Is there a risk of later realising that the company was trading recklessly? Can it continue to enter into new obligations if there is uncertainty about future revenue? Is there some external advice required to make good decisions?
Conclusion
The point of this article and these questions is not to inspire fear it is to get directors thinking about the actual position of their company in light of many complex factors at work right now. Directors should be asking questions of management – perhaps requesting more frequent updates and meetings – and documenting what their decisions are in minutes so there is a record of what they decide. We will get through this and strong leadership from Company directors will be vital for organisations to cross the bridge and get to the other side of the crisis.
This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com
