Wednesday April 22, 2020

Phil Armstrong, Partner in our Restructuring Advisory team, outlines the duties of business directors in light of relaxed government measures to support firms’ trading through lockdown.

Advising businesses in this brave new world is something of a moving feast, with those conversations a significant pre-occupation for business owners and directors. The responsibility of being a director will almost certainly be weighing heavier for every executive team across the economy as they are asked to make important decisions for the future of their business. There are also the added pressures of acting in the best interest of stakeholders and employees at a time when businesses are under stress financially. Not doing so, even if for the good of the business, brings potential legal ramifications with it.

Normally, when discussing going concern issues and financial stress, we would generally group the issues facing directors into four groups: deteriorating results, balance sheet, operational and liquidity issues.

However, in this post-COVID world, the single biggest issue facing business leaders is cash. At present, cash really is king.

In many cases, the businesses we are working with are looking to reduce costs wherever possible to preserve resources until the end of lockdown. When business re-opens, they are going to need all their cash reserves to get up and running again while repaying, over time, the debts they have accrued during the lockdown period.

Insolvency is a natural concern for those short on resources, which begins to put the actions of directors under the spotlight. Typically, when talking about directors’ duties, we would be addressing situations where a business is technically insolvent as a result of its liabilities exceeding its assets or if it is unable to pay its debts as and when they fall due.

When a company is or is likely to become technically insolvent, then a director’s legal duty moves from promoting the success of the company to protecting the interests of its creditors. If they fail to do so, they can become personally liable for the debts of the company and criminal charges can be brought against them, in addition to bans on acting as a director in future.

However, these are not normal times. As such, the government has suspended wrongful trading provisions for three months from 1 March. In effect, they have given directors a green light to prioritise their business over the position of creditors while not being exposed to wrongful trading actions

That being said, the three-month suspension doesn’t absolve directors of fraudulent trading, misfeasance and other insolvency provisions.

So, what should directors do to protect themselves from any future criticism, potential personal liability or disqualification?

Foremost, they should continue to act in good faith. If a business is without income due to government interventions then not paying landlords, suppliers etc. is not unreasonable in these exceptional circumstances. However, it is a different matter if the business still maintains a reasonable revenue stream. For example, it would not be appropriate for supermarkets or online delivery businesses to avoid paying landlords and other creditors at this time.

It’s also more important than ever to maintain good management practice. This includes creating and reviewing accurate management information, holding regular board meetings to discuss strategy and forecasts. We would recommend planning for three to six months of disruption to demonstrate a mid and worst-case scenario.

In the spirit of communication, it’s important to have open dialogue with landlords and creditors to try and establish mutual consent for deferments and standstill agreements. Document these where possible. In the interest of pursuing cash, ensure that work can be delivered on any new contracts agreed.

The three-month window is unique but one in which directors mustn’t abandon integrity and good faith.

If you found this article useful and would like to learn more, our team are hosting a live 30-minute webinar on this topic on 28 April at 12pm: Director duties and wrongful trading rules. For more information and to reserve your place, please click here.

FRP is on hand to support businesses through the ongoing challenges of COVID-19. If you have any questions about your role as a director, please do not hesitate to contact us.