March 27, 2020
Amid the unprecedented disruption to business caused by COVID-19, company directors are under pressure like never before. The Companies Act 2006 imposes certain general duties on a director of a UK limited company, which can attract personal liability on his or her part. As directors are forced to make difficult decisions in extraordinary times, they should remind themselves of these duties to ensure that the risk of challenge by any aggrieved parties is mitigated.
To whom does a director owe general duties?
A director’s general duties are owed to the company of which he or she is a director. In certain circumstances and subject to certain hurdles, an individual shareholder or group of shareholders can also bring a claim against a director for breach of duty on behalf of the company (known as a derivative action). Otherwise the decision to start proceedings against a director would be made by the board (or, in an insolvency situation, an administrator or liquidator).
The board of directors is in charge of the management of the company’s business both in good times and in bad. Although difficult when under time pressure, directors should resist the temptation to make decisions relating to the future of the company individually, and instead should seek to hold board meetings at which decisions are taken on a majority vote of the directors present. This will mean that any potentially contentious decisions are collective decisions, and the directors should ensure that minutes of all board meetings are kept to record these decisions and note that they have considered their statutory duties in making those decisions. Board meetings can be conducted by telephone if the articles of association of the company permit it, but directors should remind themselves of the provisions relating to the quorum for board meetings in the company’s articles of association in the event that directors become unwell or incapacitated during the course of the pandemic.
If directors foresee a need to streamline decision-making, they should consider formally delegating specific areas of decision-making to committees of selected directors from the board, to the extent permitted by the company’s articles of association. This will enable the company to make decisions at speed, whilst also ensuring collective board responsibility for such decisions.
In situations where a company is struggling to pay its debts, directors should consider increasing the frequency of board meetings to consider its financial position regularly.
A director may also be a shareholder or an employee of the company (or both) and, if so, will have additional rights and duties going beyond those purely connected with a director’s office as a director. It is crucial that directors draw a distinction between these separate roles and “wear the right hat for the job”, and avoid making any decisions that benefit them as shareholders in difficult circumstances to the detriment of other stakeholders.
It is important in times of difficulty that directors bear in mind their basic duties to the company, its shareholders and its creditors. Most duties will remain relevant, such as the duty to avoid conflicts of interest and to exercise independent judgment, but the following are the two key duties for directors to bear in mind in the current situation.
Duty to promote the success of the company
Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and fundamentally it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action. Obviously in times like these such judgements will be extremely difficult to make, but directors must have regard to a number of factors when making their decisions, including the likely consequences of any decision in the long-term and the interests of employees, suppliers and the community. Directors may seek to prioritise essential supplier payments, come to agreements with other creditors where possible, and claim against any insurance policies from which the company benefits. Directors should also consider the interests of the company’s employees and, where appropriate, make use of emergency schemes introduced by the Government for this purpose.
Duty to exercise reasonable care, skill and diligence
A director will be expected to exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions, as well as the general knowledge, skill and experience that he or she actually possesses. To demonstrate this, it is essential that directors keep themselves informed about the company’s affairs, in particular its day-to-day financial position, as well the evolving measures being taken by the Government. Directors should be ready to seek the experience and expertise of their colleagues and the company’s advisers (including accountants, lawyers and, if the tests for insolvency are looking likely to be met, insolvency practitioners) where they feel that they are lacking skills or experience.
We appreciate that the next few months are going to be extremely challenging for our clients and we will keep you updated on any important developments as and when further guidance or regulations are issued. In the meantime, we will be pleased to assist you with any queries you may have as quickly as we possibly can.