Many companies have been affected from the outbreak of COVID-19. Through these uncertain times, directors of these companies must endeavour to continue their responsibilities to avoid a breach of their legal and fiduciary duties.
Directors are responsible for the management of a company and are entrusted with taking care of a company’s business and matters. Under company law and insolvency law, these responsibilities are formalised as the director’s duties.
While a company is solvent, the director has a duty to act in good faith to promote the success of the company, under Section 172 of the Companies Act 2006, and the a duty to exercise reasonable skill, care and diligence, under Section 174 of the Companies Act 2006.
These two duties impose obligations on the directors to act for the benefit of a company’s members as a whole. Directors must be aware of the long-term consequences to any decisions that may affect the company’s operations, reputation and general commercial interests. Furthermore, the law determines the level of a director’s care, skill and diligence is measured by:
When applying these measures, the law will consider the specific circumstances of the company.
Unfortunately, as trading and commerce begins to decline, many companies may have to face the challenges of insolvency. Where a company has reasonable concerns of its ability to trade and pay its debts when they fall due, the directors of that company must act in the best interests of the company’s creditors. Directors must not continue to trade in such circumstance where the director knew or ought to have known there were no reasonable prospects of the company avoiding insolvency, under Section 214 of the Insolvency Act 1986. In such circumstances, directors must aim to minimise losses to the company’s creditors.
In light of the above, directors should review their company’s ongoing financial position and ensure they can justify their actions to continue trading. Proper record keeping and communication with other directors and employees in a company are a small but effective ways to maintain a director’s duties owed to a company.
The Government has announced plans to aid struggling companies (see recent guidance) to lessen the severity of COVID-19 on commerce and trade, including a relaxation on insolvency rulings where wrongful trading may have occurred. However, directors must ensure they are prepared for the potential of insolvency going forward. Although it is discouraging, insolvency does not mean a company has no further options to continue and survive this period.
Please contact our Corporate and Commercial department for advise on further directors’ duties and any the available options to a company in the event of insolvency.
For advice on corporate governance and director’s duties, please contact Claudine Lawrence, Partner and head of our Corporate and Commercial Department on 0203 827 6117 or firstname.lastname@example.org.