The coronavirus pandemic and the daily changes in guidance are presenting companies and their directors with many challenges, writes Peter McLintock, partner at leading law firm Mills & Reeve.
Just planning for “business as usual” requires changes to one’s usual practices, involving a balance between compliance obligations, coping with financial stresses and following official public health advice to protect employees and yet maintain a sense of order – a new business unusual.
What changes for me as a director?
As a director, you know that you owe duties to the company and its shareholders and if the company is getting into serious financial difficulties, the board also needs to consider the position of creditors.
What does that mean in reality, though? How do you know what is best for the company’s shareholders? It is a notoriously difficult path to tread. On one hand, continuing to run the business may mean it survives and everyone may ultimately be paid in full. On the other, keeping going might make things worse for the creditors as the company runs up more debt.
It seems that business disruption due to coronavirus is inevitable. What should you, as a company director, be doing if the disruption means that your business starts to suffer?
When the business starts heading towards insolvency, there is a change of emphasis and instead of doing what is best for the shareholders, you have to change and consider what the consequences of your actions will be for the company’s creditors.
If this is your reality and business starts to seriously suffer, you should seek advice. You can see an associated note, prepared by Neil Smyth, which contains an in-depth discussion on when a business is in distress.
Some tricky decisions
While in this period of uncertainty, big decisions can be the difference between survival and collapse. For example, should you be entering into the new lease for new premises? It might bring better productivity and improved income streams. Equally, it may mean you are weighing the business down with more debt when it can’t take on much more.
When placing a new order, if you have doubts about whether the company can pay for it, this could mean you are heading for a breach of your duties.
Does the business have sufficient cash? Consider some of the new Government guaranteed facilities available for short-term cash-flow. But remember that this is money that is interest bearing and needs to be repaid, so will be a burden on your balance sheet in the long run.
Consider if any of your contracts (supplier or customer) have “Force Majeure” clauses that would entitle one side to declare them unenforceable due to the pandemic. Conversely, if you are relying on one of these to escape liability, you should take careful advice as they do vary drastically in their breadth.
You need to think carefully before making any payments. Paying everyone on time and in full may be a source of pride for you, but where things get tight, the wrong approach may get you into difficulties with your directors’ duties. At this time, cash is definitely king.
This is not a definitive list, but it gives you a flavour of some of the things you may have to think about and the way your mindset needs to change in this very fluid and unprecedented period.
Duties and liability of the non-executive director
Although there is no difference between the legal duties of a non-executive and an executive director, the knowledge, skill and experience expected of non-executive directors is likely to be different. Also their involvement in the company is likely to be different. In particular, the time devoted to the company’s affairs will probably be significantly less for a non-executive director than for an executive director and the detailed knowledge and experience of the company’s affairs that could reasonably be expected of a non-executive director will generally be less than for an executive director.
However, what is clear is that non-executives cannot simply sit back and take a passive role. Directors on the company’s board have both collective and individual responsibility for ensuring they are sufficiently aware of the company’s affairs in order to be able to properly fulfil their duties.
That this is an active obligation is demonstrated by a 2009 Court of Appeal case where two non-executive directors were liable for the dishonest misapplication of company funds by an executive director, because their inactivity whilst they were directors had caused the resulting loss to the company.
The directors had known that the executive director had previous criminal convictions for dishonesty. The court considered that they ought to have known that certain transactions shown in the accounts required convincing explanation, and should have been on their guard in relation to any attempt to explain.
Had they fulfilled their duty, the executive director would not have been able to satisfy them that the transactions were genuine. They then should have sought advice and informed the auditors and any other directors, which would have meant that the subsequent misapplications could not have been perpetrated.
Accounts and financial duties
As a director of the company you have a personal responsibility to ensure that accounting records are maintained so that at any time they are able to demonstrate and explain the financial position of the company. Failure to do this will cause every defaulting officer of the company to be liable to a fine, imprisonment or both.
In addition, it is your responsibility as a director to ensure that full annual accounts are produced each year and sent to all members within the required time. If it is proposed that the company takes advantage of certain exemptions in relation to the preparation of the annual accounts, you will also need to be satisfied that the company meets the qualifying criteria for such exemptions.
You also have a duty to deliver the annual accounts and reports to Companies House. Failure to submit the accounts within the required period carries an automatic civil penalty payable by the company in default, which increases according to how late the accounts have been filed. Companies House has recently published an ability to extend the time period for filing accounts but care has to be taken in getting within these moved goalposts.
Corporate governance must go on
Holding general meetings, particularly as we enter AGM season for listed companies with a 31 December year-end, is another challenge in the current environment. A number of listed companies are warning about the potential impact of coronavirus to their AGMs, given the general lock down and bans on mass gatherings. Planning ahead can help minimise disruption, and we have listed some key issues to consider.
Peter McLintock is partner at leading law firm Mills & Reeve.