The Corporate Insolvency and Governance Act 2020 introduces a temporary, retrospective suspension of the directors’ personal financial liability for wrongful trading from 1 March 2020 until 30 September 2020. This is not a blanket defence to a breach of duty by directors, since the directors’ general duties to act in the best interests of the company (or, on insolvency, its creditors),will continue to apply. However, the court is to assume, for the purposes of any wrongful trading claim against a director, that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the expressed period and, therefore, not liable to contribute to the losses incurred by the company in this period (though still liable for those before or after).
To help directors navigate the challenges facing businesses while complying with their own legal duties, we have prepared a list of top ten tips that should be considered when boards are meeting to take decisions or discuss the ever-evolving picture that COVID-19 presents us with.
- All directors have duties, whether they are executive or non-executive, and irrespective of job title. Specific tasks can be delegated, for example, to the CFO/FD, but it is the responsibility of the entire board to consider the company’s financial position. At times of financial stress, ensure the board is aware of its legal duties in the relevant jurisdiction.
- Hold frequent (telephone or virtual) board meetings to consider the financial position of the business. Additional meetings should be called to consider material developments between scheduled meetings. Ensure a written record is made of all discussions and meetings with detailed reasons given for why decisions have been taken, as this will serve as an audit trail if actions are examined retrospectively.
- The board should consider up-to-date, reliable financial and operational information at those meetings, including short-term cashflow and creditor position. Are creditors becoming more “stretched” over time? Are new creditors being acquired? Consider whether and how forecasts could be impacted by COVID-19-related issues such as lockdown, unavailability of workforce or disruptions to your supply chain.
- Review financing and other key commercial contracts for potential breaches and termination events that may be triggered in the current circumstances. Engage at an early stage with your lenders and other key financial stakeholders to build and retain trust and maintain an open, regular and structured dialogue.
- Consider whether government funding is available, and its terms. Consider whether stakeholders to the business can provide support i.e. shareholders, lenders, key suppliers or customers, landlords, pension trustees.
- If decisions are being taken about prioritising payments, note that caution is required before deciding to honour payment obligations to certain creditors while leaving others unpaid.
- Be mindful of wider duties to regulators and duties of disclosure and transparency e.g. under listing rules.
- Identify and manage potential director conflicts of interest in accordance with the company’s constitution e.g. directors who also sit on parent/guarantor boards.
- Check D&O insurance cover and ensure it is fit for purpose, the premiums paid/renewals made and all claims and circumstances are properly notified.
- Take appropriate, specialist financial and legal advice to support the board’s understanding of its duties, and assist with the assessment of the financial position and input on contingency planning options.