Directors of companies have a duty to act in the interest of the business.
The current COVID-19 situation has brought about unprecedented times and difficulties for all types of commerce.
As the Government sways from bringing staff back to work to encouraging employees to work from home, directors continue to face a raft of decisions and challenges against a backdrop of economic uncertainty, the end of the furlough scheme and planning for the repayment of government loans.
John Baddeley, director in the company commercial team at Wake Smith, looks at the important considerations for directors in the current climate.
“Directors of all UK companies must comply with their statutory duties under the Companies Act 2006. A breach can lead to potential civil or criminal liability and the risk of disqualification.
“Businesses are currently facing a host of support measures from the Government to assist them through the difficulties including time to pay arrangements for tax, business rates holidays for some retail, hospitality and leisure businesses, business interruption loans for small and medium businesses and lending facilities to raise working capital.
“The current furlough scheme comes to an end in October and some businesses are facing very tough decisions especially as it looks as though there may be further restrictions in the near future eroding fragile business confidence.
“Directors should have already looked at their duties to the company and its financial position before considering adopting some of these measures.
“COVID-19 has also raised a number of specific risks for directors, testing compliance with the duties to promote the success of the company and to exercise diligence and care.
“Directors are now having to balance success in the long term with imminent threats to their business from COVID-19, scrutinising their judgment and skill, whilst maintaining the interests of competing stakeholders.
“Additional duties and obligations, such as health and safety, add further complexity to directors’ decisions in these uncertain times.”
General directors duties
Each director must:
Ensure their actions are within the powers granted to them by the company’s constitution and are for a proper purpose
Act in a way they consider will promote the success of the company for the benefits of its members as a whole.
Consider various stakeholders’ interests and, if a company’s solvency is in question, the emphasis of the duty changes so its creditors’ interests are of paramount importance.
Exercise independent judgment, not submitting to the will of others or acting in a way which restricts the board’s future decisions. Directors can rely on advice, only if they exercise their own judgment in following or not following the advice.
Exercise reasonable knowledge, experience, care, skill and diligence expected of a person in their position, and their actual knowledge, skill and experience.
Remain informed about their company’s affairs, especially in a fast moving scenario such as COVID-19, but rely on the expertise and experience of others, or delegate sensibly, without devolving their own responsibility.
Avoid conflicts of interest and not accept benefits from third parties.
Knowing the financial position of the company
At this time it is essential for directors to:
Have up to date knowledge of the finances of the company through more frequent meetings, reports and accounts.
Scrutinise all transactions to ensure compliance with the directors’ duties to the company.
Review factors which may affect turnover and profit, for example, supply chain issues, reduced demand, increased demand, logistics problems, staffing.
Check agreements such as changes in supplier terms, revised payment terms, rent reductions.
Review any consideration of any loans and compliance with directors’ duties to the company and the interests of creditors.
Steps for businesses to aid directors
All companies can help their directors comply with their duties and mitigate issues should concerns about solvency arise by:
Holding regular board meetings and ensure that decisions are properly justified and recorded.
Adopting robust procedures to identify circumstances in which duties around conflicts of interest may be breached.
Maintaining communications and constant reviews detailing up to date decisions.
Ensuring the board receives, and acts on, up to date financial information.
Taking professional advice at an early stage if the company is struggling.
For further advice on company commercial matters contact John Baddeley at [email protected]
