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Watching out for Director's Duties in difficult times

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With lockdown starting to ease and businesses starting up again after many weeks of closure, the issue of Director's Duties will begin to raise its head as directors find ways for their business to succeed in the "new normal".

Director's Duties come from several sources, the main one being the Companies Act 2006.  All directors of companies in England and Wales need to comply with these duties whether they are an executive or non-executive director and regardless of the size of the company. 

The main duties include a duty to:

  • promote the success of the Company for the benefit of the shareholder as a whole;
  • exercise independent judgement;
  • declare an interest in a proposed transaction or arrangement with the Company;
  • avoid conflicts of interest;
  • act within their powers;
  • exercise reasonable care, skill and diligence; and
  • not accept benefits from third parties.

So in the day to day running of the Company a director will have to consider all these duties (and more) whilst making business decisions, it is often a hard balance to strike as every decision involves an element of risk.  One step directors can take to protect themselves is to make sure proper minutes of meetings are taken, especially where large or important decisions are being considered, as it will show the directors properly thought through a decision before making it.

With the coming weeks and months of difficult trading directors will be put under even more pressure to make the right decision and should remember that they cannot put their own interests before those of the Company.

Some other key duty comes from the Insolvency Act 1986, which includes a duty not allow the company to trade whilst the director knows or has a reason to suspect the Company is insolvent (whether on a balance sheet test or being able to pay bills as they fall due). 

With reduced trading following the easing of lockdown and new distancing measures, companies will be in more precarious position and directors need to be aware of the financial state of the company whether through having management accounts prepared or keeping a close eye on bank accounts. 

The Government announced on 28 March 2020 that it was to suspend the operation of rules relating to wrongful trading initially for a period three months from 1 March 2020.

This was brought into law by The Corporate Insolvency and Governance Act 2020 (the "Act"). A full update is coming shortly, however the provisions work by requiring a court to assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurs between 1 March 2020 and 30 September 2020, when it comes to determining the amount that a director should be ordered to contribute to the assets of the company following a finding of wrongful trading.

Given that the provisions in Act only reduce the amount of any contribution that may be required, but not the finding of whether there has been wrongful trading directors will still need to keep a close eye on the financial position of their company.  The relaxation of the rules in the Act also does not necessarily impact upon possible director's disqualification, so although directors may not need to contribute to the debts of their insolvent company, they might find themselves subject to disqualification proceedings under which a director can be disqualified for up to 15 years.

If in doubt directors should speak to their advisers, who can help them consider the legal implications of decisions whilst navigating the current upheaval.

This blog is written to raise awareness of these issues. Whilst every effort has been made to ensure that it is correct at the time of first publication it may not be updated, even if the law changes. It is not intended to be specific legal advice and cannot be relied on as such. Chattertons are not responsible for any action take or not taken as a result of this blog. If you think any of these matters affect you then we would be happy to advise.