Directors’ duties in difficult times

Directors will undoubtedly want to do all they can to ensure the continuity of their company both during and post coronavirus outbreak however, they need to be mindful of their statutory duties.

Directors’ duties under the Companies Act 2006 include; acting in good faith in such a way as “would be most likely to promote the success of the company for the benefit of its members as a whole”; exercising “reasonable care, skill and diligence”; and to “avoid a situation in which he has, or can have, a direct or indirect interest that conflicts or possibly may conflict, with the interests of the company”.

In fulfilling their duty to exercise reasonable care, skill and diligence, the test is that of a reasonably diligent person with the general knowledge, skill and experience expected of a person in that position.

As to their duty to promote the success of the company, directors need to consider various matters including; the long term consequences of their decisions and the impact on the wider community and environment; relationships with suppliers and customers; and maintaining the high standards of their company.

That duty to promote the success of the company is however subject to "any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company".  When a company becomes insolvent, the directors' duty to promote the success of the company is replaced by a duty to act in the best interests of the company's creditors.  In this situation, directors must protect the value of the company assets and minimise losses to creditors as far as possible.  However, a director may take the view that it is in the best interests of the company and its creditors to continue trading out of difficulties, unless they know or ought to have known that there was no reasonable prospect of recovery.

During these unprecedented times, it may be difficult for directors to balance making quick decisions in the short term but trying to anticipate the long term impact once the restrictive measures currently in place are lifted or at least relaxed.  With no prior experience of this situation, it may also be difficult to measure a director’s compliance with their duty to exercise reasonable care, skill and diligence if there is nothing against which to compare.

If unfortunately your company is having difficulty in the current climate, insolvency may be something you are considering.  The UK government has proposed changes to insolvency laws to relax the current rules and allow companies to continue trading whilst exploring options for rescue, including temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months.  These changes are not immediate however and it is unclear when they will be introduced by the government.  This should however provide directors of companies which did not previously have insolvency concerns, with some comfort and breathing space as they seek to navigate these difficult times to try to avoid insolvency.  The changes may provide an extension to the abovementioned option open to directors to take the view that the best interests of the company and its creditors is to continue trading at present and thereafter to take stock once the full effect of the crisis is known once it is ended.

Directors should continuously monitor the current position and also the financial status of their company and hold regular board meetings to discuss the financial and operational aspects of the company; remembering to document this accurately for future reference.  Early and continuous engagement with lenders, customers and suppliers is essential.  Review contracts to determine whether obligations can still be met or discussions need to be had with the other parties as to amendments may also be useful. 

Most importantly, if you are in any doubt about the position of your company, seek professional advice.  Please email kirstin@mackinnons.com, graham@mackinnons.com or neilt@mackinnons.com if you have any queries or concerns.  We are all in this together and we would be happy to assist in any way we can.