Companies, CVL, Insolvency|

Covid-19 – Understanding Directors’ Duties

Over the last year, Covid-19 has created unprecedented challenges for businesses across the UK.  Some businesses have been forced to close altogether, whilst others have operated in circumstances which are not sustainable. 

In response, the Corporate Insolvency and Governance Act 2020 effectively suspended the risk of personal liability arising from wrongful trading for directors who continue to trade a company through the crisis, with the uncertainty that the company may not be able to avoid insolvency in the future.  These measures are now set to expire on 30 June 2021.

Although this alleviates the potential pressure to close otherwise viable businesses in order to avoid personal liability, it does not remove the risk of other liabilities which could arise from a breach of duty as a director. 

What is Wrongful Trading?

If a company is insolvent (for example it cannot pay its debts as and when they fall due), or it is likely to become insolvent, it is important that directors are aware that they could become personally liable if the company enters insolvent liquidation, before which they failed to carry out their duties with the appropriate level of skill and care.

In these circumstances a personal liability may arise if a director knew, or that director should have concluded, that there was no reasonable prospect the company would avoid insolvent liquidation, and in those circumstances, failed to take every possible step to minimise the potential loss to the company’s creditors. 

What about other Directors’ Duties?

The suspension of liability for wrongful trading provides some comfort but directors’ should be mindful of other statutory duties, whilst continuing to trade their business. Their actions may still be subject to scrutiny if the company enters into insolvency proceedings later down the line. 

Directors’ have various duties under the Companies Act 2006, and the following are perhaps the most relevant where a company faces financial difficulties:

  • duty to promote the success of the company for the benefit of its members as a whole;
  • duty to exercise independent judgment; and
  • duty to exercise reasonable care, skill and diligence.

Other provisions relating to director disqualification regimes have not been suspended and any director who is found to have acted in breach of their duties, could find themselves falling foul of other offences contained within the Insolvency Act.

Practical Considerations

If your business has been seriously affected by Covid-19 there are a number of practical steps that you should take to mitigate any potential risk as a director:

  • Hold regular meetings to review the company’s financial position, and projections for the future. Document any decisions to continue trading and the basis on which those decisions were made.
  • Maintain and review management accounts and contrast these with any projections that have been prepared. If these differ significantly, consider whether the projections you have are realistic and achievable.
  • If the company’s financial position worsens ensure that you seek early advice from a licenced insolvency practitioner to assess the options available.

For a directors’, the consequence of a breach of duty is not limited to a disqualification order, or disqualification undertaking – the consequence could be a financial liability. 

If you require any further information, help or advice please do not hesitate to contact us for a no obligation discussion.

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