With the business world in turmoil due to the rapid spread of the coronavirus and our determined efforts to bring it under control, company directors need to proceed with caution over the coming weeks and months to ensure that decisions made under pressure can be justified and that they stand up to scrutiny in the event they are subsequently challenged.
As Saverio Salandra, commercial lawyer explains:
‘Everything you do as a company director during the COVID-19 outbreak has the potential to be dissected when the crisis is over, whether by shareholders and financial backers, employees and trade unions, customers and suppliers, creditors and landlords or even government departments such as HMRC.’
To protect yourself against criticism and the risk of personal liability if a problem arises, it is vital that you keep yourself abreast of developments, think about the impact the virus may have going forward, plan for all eventualities and ensure that any steps you take are lawful and consistent with your contractual and statutory duties.
Detailed below are five key things you need to consider when steering a company through these unchartered waters and which will help you to manage the risks that you face.
Ensuring the safety of employees who cannot work remotely
Where you are still reliant on employees coming into work or undertaking a public role, you need to do whatever you reasonably can to protect their health and wellbeing. This means carrying out a thorough risk assessment, thinking about what you can do to mitigate identified hazards and ensuring the measures you put in place are reviewed regularly as advice and best practice guidance changes.
Remember, company directors can be prosecuted for breaches of health and safety legislation which are attributable to neglect on their part and may also be subject to disqualification proceedings where a prosecution succeeds. For this reason it is important that you take your duties seriously and ensure the decisions you make are well informed and supported by advice from a health and safety consultant where necessary.
Ensuring the company’s continued survival
Cash flow is the life blood of any business and where it is in short supply consideration must be given to the means by which the alleviation of temporary cash flow problems may be achieved. This is likely to necessitate you considering the availability of COVID-19 related grants and loans and whether a claim for business interruption may be possible under the terms of your insurance. However, be aware that some insurers are trying to resist such claims and you may need to take legal advice on your position.
You should also consider whether there are any cost cutting measures that you can take, for example by asking shareholders and senior executives to delay the payment of dividends and bonuses, seeking the agreement of staff to go part time or to be furloughed where appropriate, seeking a reduction in your rent or asking creditors for payment breaks.
Dealing with contracts you can no longer perform or which have become prohibitively expensive to honour
Dealing with commercial contracts that are no longer feasible can be difficult and will usually require advice from a lawyer to ensure they are handled appropriately.
In circumstances where a contract can no longer be performed, it may be possible for you to rely on a force majure clause in your agreement to bring the contract to an end or to achieve the same result via the law of frustration. However, you need to proceed with caution to avoid effecting a termination in circumstances where this is not justified in order to avoid putting the company in breach of contract and therefore at the risk of being sued.
The renegotiation of contract terms may be possible where performance can still be made and particularly where a contract contains a material adverse change clause permitting renegotiation if circumstances alter, or in the context of longstanding arrangements where your relationship with the counterparty is good and the changes being sought are temporary.
Dealing with a company on the brink of collapse
The Government may have suspended the wrongful trading provisions of the 1986 Insolvency Act until June 2020, but that does not mean you can carry on running a company that is in obvious danger of going to the wall without fear of any repercussions.
If your company’s financial situation becomes so dire that you worry about long term viability, then professional advice should be sought on your options for trying to find a way out of the difficulties you face and on the personal risks you may assume by trying to battle on.
These risks include being sued for alleged negligence or misfeasance by disgruntled shareholders and creditors. There is also the potential for disqualification where the company collapses and your conduct during the crisis is subsequently judged to make you unfit to be concerned in the management of a company going forward.
Ensuring your decisions stand up to scrutiny
Your decisions are far less likely to be subject to a successful challenge if you can demonstrate the process you went through to make them and that they were reasonable decisions to make given the circumstances.
The easiest way to do this is to prepare contemporaneous notes which explain the decisions you have taken, the rationale behind those decisions and why they were considered appropriate at the time.
While social distancing measures may be eased, it will be some time before businesses can begin to trade again with some degree of normality. Because of this, it is important when making decisions on behalf of the company you work for to:
- plan for all eventualities;
- take account of government guidance and current best practice guides;
- document the reasons for making the decisions you take; and
- seek legal advice on your position where you have any concerns.
By taking this approach, you will limit the chances of your handling of company business during the crisis being called into question and improve the likelihood of the decisions you make being the rights ones.
Finally, you should also ensure that adequate directors’ and officers’ liability insurance is maintained in order to provide you with a security net in the event that things go wrong.