Directors' duties - considerations for directors during Covid-19

The Covid-19 pandemic has had a significant effect on the economy and has presented unprecedented challenges for businesses. Amidst such uncertainty, it is important that directors are aware of their duties and responsibilities which continue to apply notwithstanding the pandemic.

Directors' general duties under the Companies Act 2006

Directors are tasked with the management and control of the business. Their general duties under the Companies Act 2006 are as follows: duty to (i) act within powers; (ii) promote the success of the company; (iii) exercise independent judgment; (iv) exercise reasonable skill, care and diligence; (v) avoid conflicts of interest; (vi) declare interest in a proposed transaction or arrangement with the company; and (vii) not to accept benefits from third parties. Further details in relation to these general duties are contained in our 'Handy Guide to Directors' Duties', which is available here.

Considerations for directors during current Covid-19 pandemic

The impact of the Covid-19 pandemic and how we emerge from lockdown will currently be pre-occupying boards of directors as they make decisions to navigate the specific issues that require to be considered in the context of their business. We set out below some specific examples of the critical matters which directors should be considering just now and the decisions which they need to take having regard to the current business landscape, in the context of their general duties.

A director must act in a way they consider, in good faith, would be most likely to promote the success of the company, for the benefit of the members as a whole. "Success" will generally mean an increase in value of the company, but it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action and the current pandemic will be causing directors to view this duty, in particular, through a new lens.

Recalibrating their view of "success" to reflect Covid-19 issues impacting on the business will be vital, particularly for those large companies that are required to include a "section 172 statement" in their strategic report (helping shareholders assess how the directors have performed this duty), for this financial year.

In order to promote the success of the company, in the current circumstances, directors would be advised, where relevant to:

• review their supply chain and commercial contracts in order to mitigate the uncertainty caused by Covid-19 (please see our previous blog on this here, which includes a useful five step plan);
• constantly check the company's financial information and cashflow position in order to monitor the immediate (and possible long-term) implications for the company;
• look at the availability of loans and/or Government aid which may help to protect the business through the economic disruption (please click here for our recent blog which provides further information on such Government support schemes and the relevant eligibility criteria);
• check their insurance policies closely to establish scope of cover in light of the effects of Covid-19 (please see our previous blog in relation to business interruption insurance here);
• keep under review the furloughing of employees (more information in relation to the Coronavirus Job Retention Scheme is available in our FAQs here); and
• implement safe working conditions, including a return to work when permitted (further information is available here, here and here).

The difficult and immediate decisions directors are having to make will, inevitably, be made with a shorter term view of "success" than in more 'normal' times. Some decisions might have to be made quickly and during a period when the situation continues to develop and change. Not every decision will turn out to be the correct one and some may require to be changed or amended as the landscape takes the next twist.

The list of matters that directors should have regard to, when complying with the duty to promote the success of the company, should provide some comfort as they include the interests of employees, business relationships with suppliers, customers and others, the impact on the community and environment and maintaining the reputation of the company for having high standards of business conduct. Directors are most unlikely to be held to have breached this duty where decisions have been taken to safeguard employees, avoid reputational damage and ensure the company's continued viability, even if there is short term financial detriment to shareholders. Directors should document their efforts to comply with their duties, providing explanations of the reasons behind their decisions

In certain circumstances, directors should put the interests of creditors first. Insolvency concerns will be particularly relevant in the current climate – please click here for a previous blog concerning directors' duties and the impact of insolvency. Note also that on the 28th March 2020, the government announced the retrospective suspension of wrongful trading provisions, which will apply temporarily for three months following 1 March 2020. We recently published a legal update in relation to this which is available here.

Conclusion

In light of the current unprecedented circumstances, it is particularly important that directors are aware of their duties and that these duties continue to apply during the Covid-19 pandemic. Directors should be informed, proactive and engaged. There are steps directors can take and they should be mindful of these as they aim to steer businesses through these uncertain times.

How can Brodies Help?

We regularly advise directors and have extensive knowledge of the latest government regulation and guidance in relation to Covid-19. For more information please do get in touch with any member of the corporate team or your usual Brodies LLP contact.