July 23, 2020

“Great Expectations” – Directors’ Duties in the age of Covid-19

One remarkable change which has occurred as a result of the Covid-19 pandemic in the UK, is the lightening speed by which the UK Parliament has passed the Corporate Insolvency and Governance Act 2020 (the Act), which received Royal Assent and therefore passed into law on 25 June 2020.  

The objective of the Act has been to provide the flexibility and space in which UK companies can continue to trade in the difficult economic climate that the UK currently finds itself in.   It also aims to alleviate some of the pressure that directors of limited companies would have no doubt felt in recent months.

In this article, Holmes & Hills' commercial law solicitors focus upon the key measures in the Act and also provides a useful summary of directors’ duties in the UK.  

Directors duties

The director of a limited company incorporated in the UK has an overall duty to act in the “best interest of that company”. The Companies Act 2006 imposes certain general duties on a director as follows.

A Director must:

  1. Act within its powers.
  2. Promote the success of the company.
  3. Exercise independent judgement.
  4. Exercise reasonable care, commerce, skill and diligence.
  5. Avoid conflicts of interest.
  6. Not accept benefits from third parties.
  7. Declare interest in proposed or existing transactions or arrangements with the company.

There are also other duties and obligations placed on directors from sources beyond the main UK company legislation, including fiduciary duties and also those imposed under other UK legislation, such as health and safety legislation, anti-corruption legislation and environmental legislation.

Consequently, directors’ duties to their company has meant that the Covid-19 pandemic has placed directors in difficult situations, with regards to adhering to their duties and preventing the company from avoiding an insolvent liquidation or administration situation.  

Wrongful trading - what has changed?

Historically, where a company is in financial difficulties and is at risk of becoming insolvent, then the director’s duty shifts to having regard to the interest of the company’s creditors as a whole.  When a director knew or ought to have reasonably known as a company would not avoid insolvent liquidation or administration, he or she is under the duty to take every step which a reasonably diligent person would take to minimise potential losses to the company’s creditors.  

If a director has failed to take such action, then he is at the risk of wrongful trading which carries with it unlimited personal liability.  

You can see how the wrongful trading provisions may have caused directors a considerable amount of stress in light of Covid-19. 

A key feature of the Act has been the suspension of the wrongful trading amendments in the Insolvency Act 1986.    The suspension applies in relation to a company’s financial position during the relevant period, being the period beginning 1 March 2020 and ending on 30 September 2020.   This provision should give many directors a breathing space to consider their company’s financial positions in light of Covid-19.  

Please be aware however that this wrongful trading suspension is not available to directors of financial services firms, such as insurance companies and banks.  

In assessing what contribution, if any, a director is to make to a companies’ assets, when considering that directors liability for wrongful trading, the Court is to assume that the person is not responsible for any worsening of the financial position of the company during the relevant period.  

Therefore, the provisions of the Act do not take away the directors’ duties to act in the best interest of the companies’ creditors but minimises that individual director’s personal liability.  

New moratorium

The Act also introduces a new moratorium intended to provide companies with breathing space to explore other financial options for their survival.

Again, as with the wrongful trading provisions, financial services companies such as insurance companies and banks are ineligible for the new moratorium provisions.  

A distressed company which can realistically be rescued as a going concern, can obtain a 20 business day moratorium from creditor action enabling it to consider viable restructuring options or to seek new investment.

The moratorium can be extended by a further 20 business days thereafter but any further extensions will require the consent of the Court or the company's creditors.  

The moratorium also imposes restriction on what the company and its directors may do (unless the necessary consent is obtained).

Need advice?

As you can see, the above two measures are just some of the ways that the UK Government is trying to assist UK companies survive in the difficult economic situation arising from the Covid-19 pandemic.  

Directors have considerable duties at any time and which have been particularly pulled into focus in the current Covid-19 crises.   To the extent that you are a director of UK limited company and require any further advice regarding the current UK legislation, or wish to discuss your director’s duties in the relation to the pandemic, then please do not hesitate to contact Holmes & Hills' team of commercial solicitors.

Key Contact

Natalie Stoter

Consultant Solicitor

nas@holmes-hills.co.uk

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