1. What are the key topics that boards should focus on to ensure proper discharge of their duties as directors, as their businesses return to work following a lockdown?
As several businesses resume operations following the pandemic, some of the key topics that boards should focus on to ensure the proper discharge of duties of directors are:
- Compliance with government protocols and regulations on COVID-19: The government of Kenya, through Legal Notice 50 of 2020, declared workplaces, or any place ordinarily accessed by members of the public or a section of members of the public, to be public places. Strict protocols were introduced in relation to public places, which include the wearing of masks at all times and maintaining a distance of at least 1 m. The directors of a company are ultimately responsible for compliance matters relating to the company. The directors are thus responsible for ensuring that the company complies with all the government protocols and regulations aimed at curbing the spread of COVID-19. This includes ensuring that persons entering premises owned or occupied by the company comply with government directives on social distancing and wearing of masks.
- Responsibility over safety of employees and clients/customers: Employment law, work injury benefit law, as well as the law of torts place a burden on a company, in its capacity as an employer, to ensure the welfare of its employees. Further, the concept of occupier's liability requires a company to take reasonable care to ensure the safety of all persons visiting its premises. As businesses resume operations, companies shall be required to ensure that they put in place reasonable measures to protect the welfare of their employees, as well as that of their clients, customers and other persons who visit their premises. Directors of companies shall be ultimately responsible for putting in place the necessary measures to ensure safety of employees, clients, customers and other persons who visit their premises.
- Mitigation of risks: COVID-19 has introduced an array of risks that were not previously inherent in business activities. These risks include legal and regulatory compliance risks in complying with government directives and protocols to curb the spread of COVID-19, such as taking measures to ensure social distancing within company premises. Other risks include the requirement to take reasonable measures to ensure the safety and wellbeing of employees, clients, customers and other persons who may visit the company’s premises. Failure to put in place proper risk mitigation measures may result in lawsuits and negative publicity. As businesses resume operations, directors of companies should consider focusing on measures to mitigate various risks caused by COVID-19 to ensure business continuity.
- Overall success of the business: Directors have a statutory duty under the Companies Act, 2015 to promote the success of the company. This duty is particularly important in the post-COVID-19 era, since the directors shall be expected to make decisions and take various actions aimed at ensuring the overall success of the business of the companies.
2. Should boards adopt particular governance practices in this context?
Boards may, subject to confirming the proposed practices are legally valid in accordance with the company's constitutional documents and the Companies Act, consider adopting or strengthening various governance practices in the post-COVID-19 era, including the following:
- Effective risk management: The pandemic has introduced significant risks to businesses. Boards of companies should be careful to put in place effective risk management measures, to protect their businesses. These could include taking measures to ensure liquidity, preservation of cash and establishing protocols to limit the spread of COVID-19.
- Board meetings and general meetings: Due to limitations on public gatherings, it may not be possible to hold general meetings in the traditional manner. Directors, being primarily responsible for convening board meetings and general meetings, shall be required to review the constitutional documents of the companies and the Companies Act to explore how they can convene board and general meetings in compliance with the government's directives on limitations of public gatherings. In April 2020, the High Court of Kenya issued directions to companies listed at the Nairobi Securities Exchange which cannot hold general meetings due to COVID-19, to use technology to convene general meetings, subject to obtaining a No Objection from the Capital Markets Authority. In light of this, directors should consider adopting technology to effectively convene and undertake company meetings.
- Increased accountability: Directors are primarily accountable to the shareholders of the companies and are required to be prudent with the resources of the company and put them to good use to promote the success of the company. This responsibility and duty cannot be overemphasised in the post-COVID-19 era, especially with limited resources and companies struggling with liquidity challenges. Boards should therefore ensure that company performance reporting systems are transparent and accurate and have adequate checks and balances. Further, with regard to publicly listed companies, the Capital Markets (Securities) (Public Offers Listing Disclosures) Regulations require them to make certain disclosures to stakeholders e.g. profit warnings, price sensitive information and material risks specific to an issuer, its industry or securities arising from or in connection with COVID-19.
- Performance evaluation: COVID-19 is likely to bring the performance of companies, boards, individual board members, management and employees of companies into sharp focus. Boards will therefore need to ensure that there is a credible performance evaluation and reward system that is aligned with the company’s goals and objectives. This will ensure that despite the pandemic, good performance is recognised and rewarded, and thus enhanced.
- Cash retention and cost-saving: Due to the challenges caused by COVID-19, several companies are likely to assess various measures to preserve cash such as deferring payment of dividends and director/employee incentives. If the company’s liquidity is constrained as a result of COVID-19, the board may need to review its dividend policies and director or employee incentive payments.
3. To what extent are boards being encouraged to take into account corporate purpose and values in the context of COVID-19 and a return to work?
Since the first coronavirus case was reported in Kenya, the government of Kenya, private companies, members of the UN family in Kenya and civil society organisations came together to form the National Business Compact on coronavirus, a platform for collaboration for all of the stakeholders to coordinate and collaborate in tackling the pandemic. Some of the initiatives of the Compact include creating a unified communications strategy to amplify the government’s messaging on how to stay safe and limit the spread of the virus, distribution of hygiene facilities, including soap and water, particularly in vulnerable communities, and the establishment of a fund to raise funding to augment the government's response to the pandemic.
While there has not been a total lockdown in Kenya, the government has encouraged companies to be considerate, particularly to employees, despite the economic downturn, and to seek to protect them from the challenges stemming from the pandemic.
As companies gradually resume operations, they are generally encouraged to adopt innovative ideas and strategies to ensure the safety of employees and clients/customers while remaining prudent to ensure sustainability and continuity of their businesses.
The post-COVID-19 era is an especially important time for businesses to consider what impact they have on the environment and society generally. Businesses are being encouraged to promote the right ethos. Such actions will go a long way in enhancing the place of a business in the society and earn it the goodwill it requires to thrive in the market post-COVID-19.
4. Your company is facing liquidity issues as a result of COVID-19:
a. What are the repercussions for continuing to operate your company?
Under Kenyan insolvency law, a company which is unable to pay its debts as and when they fall due or whose liabilities exceed its assets is considered insolvent.
If your company is, or is at risk of being insolvent, continuing to trade regardless of the risks can lead to the directors being accused of wrongful trading were the company to go into liquidation.
If, in the course of the liquidation of a company, it appears to the liquidator that the company’s directors knew or ought to have known that there was no reasonable prospect that the company would avoid being placed in insolvent liquidation, the liquidator may make an application for wrongful trading to the court. If successful, the directors will be personally liable and will be required to make such contribution to the company’s assets as the court deems appropriate. As soon as a director is aware that there is a risk of the company being or becoming insolvent, they should be extremely cautious regarding the company’s further trading and related conduct as the director’s reputation and personal assets are potentially at risk.
b. Do you have to file for insolvency if your company cannot pay all its debts as they fall due?
Not necessarily. A distressed company has various options when it is unable to pay its debts as and when they fall due.
The company may opt for a voluntary debt restructuring with its lenders. The company could also consider a company voluntary arrangement under the Insolvency Act 2015 (Insolvency Act), a scheme of arrangement under the Companies Act 2015 (Companies Act) or an informal restructuring process.
The best restructuring option for a company will depend on a number of factors, including whether:
- there is inherent value in the company and whether its medium to long-term business plan is sound, or can be made so;
- a consensual restructuring with all the creditors (including the secured creditors) of the company is possible; and
- there is a need to preserve key business licences and business goodwill.
In certain cases, where insolvency seems inevitable, it may be better to cease trading and voluntarily wind up the business. The company may also opt to go into administration as opposed to liquidation where the business can be salvaged.
c. Are there any steps that should be taken to minimise the risk of your actions as director being challenged?
Pursuant to section 506 of the Insolvency Act, a court will not make an order for wrongful trading if, knowing there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration, the director took every step with a view to minimising the potential loss to the company's creditors.
In such a situation, the directors can take the following steps to reduce the potential for personal liability:
- seek appropriate and relevant professional advice (and act upon it) to help the company meet its legal requirements;
- convene regular board and management meetings and ensure accurate minutes are kept and circulated;
- ensure they have up-to-date financial information at all times;
- a liquidator or administrator who is considering whether a director is liable for wrongful trading will look to see what a particular director knew and what a reasonable director should have known in the circumstances (e.g. increasing pressure from creditors, late filing of accounts); and
- ensure that the company’s name appears on all business letters including emails, notices, official publications, orders, invoices, receipts, cheques.
Note that resignation of directors when a company is in dire straits may in some instances be deemed as a retraction of the directors’ responsibilities, rather than performance of them, and therefore may not provide a defence, and may even be looked upon unfavourably by the courts.
d. Will your company be wound up if you fail to make payments when due?
This is a possibility. The Insolvency Act allows for commencement of compulsory liquidation against a company by the filing of a winding-up petition in court.
The petition may be presented by creditors, a company’s director, its shareholders or any administrator or liquidator, if the company is already in voluntary liquidation.
The grounds on which a court can make a winding up order include where a company is unable to pay its debts. Inability to pay debts can be established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company’s goods which remains unsatisfied.
This material was prepared by DLA Piper Africa, Kenya (IKM Advocates)