The Corporate Insolvency and Governance Act 2020 came into force on 26 June 2020 providing the UK (but with separate provisions for Northern Ireland) with temporary and permanent changes to insolvency law aimed at helping businesses manage the economic implications of COVID-19.
This included emergency measures to provide protection to directors of companies which continue to trade, notwithstanding the threat of insolvency due to COVID-19.
At the end of September, as a result of the continued COVID-19 pandemic crisis, the government has decided to extend some, but not all, of the emergency measures put in place in June. At the time, the retrospective suspension of the directors' personal financial liability for wrongful trading was not extended.
The UK government has now renewed the suspension of wrongful trading liability for directors, originally in place from 1 March 2020 to 30 September 2020 by creating a new second suspension of this liability to apply between 26 November 2020 and 30 April 2021 (but with no retrospective effect).
In deciding whether a director should make a financial contribution to the assets of a company in financial difficulty, a court would need to consider only behaviour before 1 March 2020 and between 1 October and 25 November as potentially objectionable.
This temporary suspension is not a blanket defence to a breach of duty by directors, since the directors' general duties to act in the best interests of the company (or, on insolvency, its creditors) continue to apply and so directors still have to consider the impact of COVID-19 on a business, in particular, on any decisions on whether to continue to trade. This latest legislation creates some uncertainty for directors and, effectively, a two-month hiatus period not covered by a suspension of liability for wrongful trading.
To help directors navigate the challenges facing businesses while complying with their own legal duties, we have prepared a list of top ten tips that should be considered when boards are meeting to take decisions or discuss the continued challenges COVID-19 presents.
- All directors have duties, whether they are executive or non-executive, and irrespective of job title. Specific tasks can be delegated, for example, to the CFO/FD, but it is the responsibility of the entire board to consider the company's financial position. At times of financial stress, ensure the board is aware of its legal duties in the relevant jurisdiction.
- Hold frequent (telephone or virtual) board meetings to consider the financial position of the business. Additional meetings should be called to consider material developments between scheduled meetings. Ensure a written record is made of all discussions and meetings with detailed reasons given for why decisions have been taken, as this will serve as an audit trail if actions are examined retrospectively.
- The board should consider up-to-date, reliable financial and operational information at those meetings, including short-term cash flow and creditor position. Are creditors becoming more "stretched" over time? Are new creditors being acquired? Consider whether and how forecasts could be impacted by COVID-19-related issues such as a second nationwide lockdown, unavailability of workforce or disruptions to your supply chain.
- Review financing and other key commercial contracts for potential breaches and termination events that may be triggered in the current circumstances. Engage at an early stage with your lenders and other key financial stakeholders to build and retain trust and maintain an open, regular and structured dialogue.
- Consider whether government funding is available, and its terms. Consider whether stakeholders to the business can provide support i.e. shareholders, lenders, key suppliers or customers, landlords, or pension trustees.
- If decisions are being taken about prioritising payments, note that caution is required before deciding to honour payment obligations to certain creditors while leaving others unpaid.
- Be mindful of wider duties to regulators and duties of disclosure and transparency e.g. under listing rules.
- Identify and manage potential director conflicts of interest in accordance with the company's constitution e.g. directors who also sit on parent/guarantor boards.
- Check D&O insurance cover and ensure it is fit for purpose, the premiums paid/renewals made and all claims and circumstances are properly notified.
- Take appropriate, specialist financial and legal advice to support the board's understanding of its duties, and assist with the assessment of the financial position and input on contingency planning options.