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?
The main duties of a director are set out in the Companies Act 2006 (the Act). As companies return to work after the COVID-19 outbreak, the following two duties remain key:
- The duty to act in good faith to promote the success of the company for the benefit of its members as a whole: when discharging this duty, directors must consider the company's stakeholders, including employees, customers and suppliers.
- The duty to act with reasonable care, skill and diligence: directors must meet the minimum standard of skill and care expected of someone in their position and must also use their particular skills and experience – so the more qualified or experienced a director is, the greater the statutory standard required of them.
To satisfy these duties, it is essential that directors continue to provide oversight and direction as companies begin the process of recovering from the crisis. As part of this process, the following practical steps are recommended:
- Board engagement: all members of the board should engage with their management teams so they can understand and assess the impact of, and, if necessary, revisit, decisions taken in response to COVID‑19. Companies will need to monitor and revise their actions on a regular basis as existing government restrictions are lifted, new requirements imposed and support measures withdrawn.
- Employee safety: as companies return to work, boards should prioritise the health and safety of their employees. This could necessitate changes to working locations, times, practices and environments and plans will need to be updated as advice evolves regarding workplace safety practices.
- Communication with employees: inevitably, compliance with government and medical guidance aimed at safeguarding employees will necessitate day‑to‑day changes to working practices. It is crucial that such changes are clearly communicated to employees in advance of their return to work and then updated, as required, following their return.
- Stakeholder engagement: in these uncertain times, it is more important than ever to engage with the company's stakeholders and understand, and respond to, their concerns. It is vital that boards take into account the interests of their stakeholders when considering what actions to take as companies return to work.
- Updating strategy: the future prospects and plans of most businesses will have been affected by the crisis and boards should review their strategic plans and reassess opportunities and challenges. When reviewing strategy, boards should be considering carefully the interests of the company's stakeholders and how revisions to the strategy promote the long‑term success of the company.
- Updating risk assessments: in light of the significant changes that have arisen from COVID‑19, companies should undertake risk assessments to identify, and evaluate, the risks facing their company. Steps must then be undertaken to mitigate new risks identified (e.g. the need to ensure employees and visitors can physically distance, alterations to access arrangements to premises; additional cleaning of premises; and whether face‑to‑face meetings are required).
- Awareness of government/regulator actions: the government has introduced numerous temporary measures to combat the effects of the crisis (see our online guide COVID-19: The governmental response for more information on these measures), with those measures due to be phased out in stages. Boards should engage with their advisors to ensure they understand the impact of the measures on their company, as well as the likely impact of the withdrawal of those measures.
- External communication: companies must maintain contact with their wider stakeholders and work closely with them to ensure that the board's plans and assessments align with the behaviour and expectations of those stakeholders. Listed companies need to consider carefully their obligations to disclose information in a timely manner to their shareholders and the wider market (e.g. do trading updates need to be made?).
The Financial Reporting Council has published updated guidance for companies on corporate governance and reporting matters, which highlights some key areas of focus for boards in maintaining strong corporate governance practices.
2. Should boards adopt particular governance practices in this context?
Boards should consider carefully whether any changes or additions are required to the board composition, either on a permanent or temporary basis, in light of the altered demands facing the board as a result of the COVID‑19 crisis. While all directors need to be engaged fully with the company's transition back to work, boards should consider whether subcommittees should be formed to oversee particular aspects of the company's return to work.
To facilitate effective and timely decision-making, boards should also evaluate whether additional, or more frequent, reporting to the board is required. In addition to considering whether changes are required to information flows to the board, the frequency and format of updates emanating from the board should be reviewed. Communication to the company's stakeholders will be critical in the return to work.
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?
In recent years, boards of both listed and private companies in the UK have been encouraged to take greater account of the interests of a broader range of stakeholders and extend their corporate purpose beyond financial performance. As a consequence, many boards already consider stakeholder interests and ESG matters when determining the corporate purpose of their company and encompass these matters when embedding, and overseeing, corporate culture. When considering issues arising as a result of COVID‑19 and a return to work, boards will inevitably focus on their stakeholder interests, particularly employees, but this is likely to align with their corporate purpose. The current crisis will also prompt boards to further reflect on, and, if necessary, update their conception and articulation of corporate purpose and values.
4. Your company is facing liquidity issues as a result of COVID-19:
- What are the repercussions for continuing to operate your company?
Directors have a primary duty to act in the best interests of and promote the success of the company for the benefit of its members as a whole. When a company is, or is likely to become, insolvent, but not yet in a formal insolvency process, this duty changes so that the directors must act in the best interests of the creditors as a whole. The exact trigger point for this change will depend on the particular facts, but assessing the balance sheet, the cashflow forecasts and the risk of running out of cash will be determinative factors.
Under the Insolvency Act 1986, a director can be personally liable for company losses where a court finds that, at some time before the administration or liquidation commenced, the director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent administration or insolvent liquidation and, thereafter, the director failed to take every step with a view to minimising the potential loss to the company's creditors that they ought to have taken – this is known as wrongful trading. However, the director will be excused if the court is satisfied that, from the relevant time, that director took every step with a view to minimising the potential loss to the company's creditors that they ought to have taken.
On 28 March, the UK government announced a temporary suspension of wrongful trading legislation with effect from 1 March 2020. Legislation to implement that suspension has been introduced in the Corporate Insolvency and Governance Act 2020. Rather than completely switching off the wrongful trading rules (as was expected after the government’s announcement), the Act states that when considering the personal contribution a director is required to make, the court is to assume the director is not responsible for any worsening of the financial position of a company or its creditors during the period 1 March 2020 to 30 September 2020. A second suspension on wrongful trading was announced on 26 November 2020 and applies for the period between 26 November 2020 and 30 April 2021. Generally, directors will not become personally liable for wrongful trading unless their action has contributed to a worsening of the company’s financial position, so this change provides comfort for directors that they are unlikely to be personally liable for wrongful trading.
However, directors’ actions will still remain subject to scrutiny, most notably under the directors’ disqualification regime and fraudulent trading rules. Directors should therefore continue to act responsibly and reasonably to protect value and minimise loss, and should evaluate carefully whether continuing to trade is in accordance with their wider duties as directors. For more detail on the changes to wrongful trading rules, see our article here.
- Do you have to file for insolvency if your company cannot pay all its debts as they fall due?
If the company is able to pay its debts only after the date they fall due, it is insolvent even if the value of its assets outweigh its liabilities. While the temporary changes to wrongful trading rules are in operation, directors will have greater latitude to continue to trade despite their business being technically insolvent. However, directors should still act with due care and diligence and seek to minimise loss to creditors. The rules on fraudulent trading and director disqualification remain in place and are effective. When the temporary suspension of wrongful trading is lifted, directors will not be liable for wrongful trading simply because the company is trading whilst insolvent. The key test is whether as director they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent administration or insolvent liquidation. Directors should follow a strategy that has a reasonable prospect of avoiding insolvent proceedings and monitor that strategy.
- Are there any steps that should be taken to minimise the risk of your actions as director being challenged?
Steps directors may take to try and protect themselves from future challenge or scrutiny include:
- holding regular board meetings especially given how fast matters are developing, and ensuring decisions are minuted with reference to all factors considered and taken into account;
- ensuring all directors have full information from the business – all accounts and financial statements, key contracts and pipeline;
- considering whether there are any ways of minimising losses, such as temporarily closing down non-core operations;
- obtaining advice from financial advisors and lawyers; and
- engaging regularly with stakeholders.
Being proactive by anticipating issues or dealing with problems as soon as they arise can increase a business’s chance of success/survival.
For more details, please see our article Directors’ Duties: Making Decisions in a Crisis.
- Will your company be wound up if you fail to make payments when due?
In April 2020, the UK government announced its intention to temporarily restrict the use of winding-up processes. These restrictions have been introduced by the Corporate Governance and Insolvency Act 2020. The restrictions in the Act have retrospective effect, and even before the Act came into force, the courts had prevented creditors from presenting winding-up petitions citing the upcoming changes in the law.
The Act prevents any statutory demands made against companies in the period between 1 March 2020 and 31 March 2021 from being used as the basis of a winding-up petition on or after 27 April 2020.
The Act also provides that a creditor may not present a winding-up petition during the period 27 April 2020 to 31 March 2021, unless the creditor has reasonable grounds for believing that either:
- coronavirus has not had a financial effect on the debtor company; or
- the company would have been unable to pay its debts regardless of coronavirus.
Similarly, a court will not make a winding-up order on the basis of a petition presented in that period unless the court is satisfied that the company would have been unable to pay its debts regardless of coronavirus.
These restrictions were initially in place until 30 September 2020, but were extended by regulation to apply until 31 December 2020 and further extended by regulation to apply until 31 March 2021.
For more detail on these restrictions, see our article here.
However, even while these restrictions are in place, directors should maintain a dialogue with all stakeholders, including creditors, to keep them apprised of the company’s position, and all decisions (even if made under pressure and taken quickly) should be documented.