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26th March, 2020
The impact of coronavirus on company cash flows is extreme. With the increased restrictions on movement of people and non-essential economic activity, many well-run companies could be facing the possibility of insolvency.
In such circumstances, directors need to understand the nature of their duties and take appropriate advice. It is hoped that as many companies as possible survive the disruption to trading, particularly with the various support packages in place. Where a company’s continued solvency is in the balance, directors would ordinarily need to take care to avoid potential personal liability for wrongful trading. On 27 March, the laws in this regard were temporarily changed to support the survival of businesses.
Directors have a duty under section 172 of the Companies Act 2006 to act in the way that they consider, in good faith, will promote the success of the company. In discharging this duty, the Companies Act sets out a number of factors that need to be considered.
Protecting the workforce through closure of premises and imposing homeworking where possible, and furloughing staff where appropriate, are measures that contribute to short term disruption, but may well support success over a longer timeframe. Directors are having to make decisions quickly, often within hours, that would ordinarily take weeks or months to consider. It is important that directors hold meetings regularly and properly minute, in detail, the rationale for decisions made. At this time, physical meetings should be avoided where possible to comply with the social distancing requirements. If decisions made with limited information in a rapidly changing environment turn out to be poor, being able to evidence that decisions were made in good faith is likely to mitigate the risk of claims being made against directors.
If the continued solvency of a company starts to look uncertain, the nature of directors’ duties change. In such circumstances, directors need to consider the best interests of the creditors of the company as a whole. Directors need to ensure that they protect themselves against potential personal liability by taking professional advice. This is often from insolvency practitioners and from lawyers.
There are a number of possible adverse consequences in the event that directors fail to comply with their duties in the lead up to a corporate insolvency. On 27 March 2020, Business Secretary Alok Sharma announced temporary changes to the UK Insolvency Laws to support the survival of businesses. The proposals are intended to protect directors from a risk of personal liability in the event that they take advantage of government backed borrowing at a time when it is unclear whether their company can survive.
Below we consider the wrongful trading laws which have been temporarily amended, and some other insolvency related provisions which directors should also be aware of:
In addition to the changes to wrongful trading laws, proposals were announced to introduce:
The proposals will also include balancing measures to provide comfort to creditors and suppliers that they will not suffer increased losses during a moratorium.
Under the existing laws, a moratorium generally only applies after a notice of intention to appoint an administrator has been filed, and then only for 10 business days. It is expected that the moratorium that will be introduced in connection with coronavirus will be longer, possibly between 1 and 3 months. The Government intends to introduce legislation to implement these proposals at “the earliest opportunity”.
It is incredibly challenging for directors to make the best decisions for a company where the landscape is constantly changing in such dramatic and unexpected circumstances. There are nevertheless steps that directors should take to protect themselves:
If you have any queries regarding directors duties, or are a director of a company facing financial difficulties during these difficult times, please do not hesitate to contact one of our team.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.
To contact us, please fill out this form and we will get back in touch as soon as possible. Your personal data will be processed in accordance with our privacy policy which can be found here.