Throughout the COVID-19 pandemic, directors of companies across all industry sectors, ranging from small family enterprises to large multinationals, have been working flat out to keep businesses afloat. But as life begins to return to a semblance of normality, what risks will those directors face themselves during the challenging months ahead? We consider some of the key exposures which directors and officers need to keep in mind, and manage, in these uncertain times; where problems might emerge; and how such risks might be mitigated.
As with most things, awareness is key. With a cautious note of optimism, the best protection for those managing businesses is to be aware of the extent, and implications, of the relevant legal obligations and risks, to ensure that decisions and actions are taken having due regard to those obligations and risks, and to establish procedures in advance, to enable issues to be dealt with appropriately and expeditiously as they arise.
The obligations of directors
DIRECTORS' DUTIES TO THE COMPANY
All directors - including executive and non-executive, de jure and de facto, nominee, and (while there remains some uncertainty as to the precise extent) shadow, directors - owe duties, including fiduciary duties, to their companies, meaning that the director must put the interests of the company ahead of his or her own. Whether or not an individual is a "director" (and, consequently, subject to the relevant duties) will depend on the specific circumstances of his or her role.
Particularly in the current environment, it should be borne in mind that the duties continue to apply to furloughed directors; discharging those duties during a period of furlough will of course present its own challenges. Similarly, the position of nominee directors, who are subject to the same duties, is likely to become a significant area of focus if and when shareholder disputes emerge.
Possible complications can arise in the context of individuals with multiple-directorships (particularly of companies within the same group). Where the companies' interests are ordinarily aligned, the roles can, and often do, become blurred; while the interests of the group should of course be considered, the duties owed to each company must be observed.
WHAT ARE THE PRINCIPAL DUTIES?
The main duties owed by company directors, long-present at common law, are codified in sections 171 to 177 of the Companies Act 2006.
The duties codified in the Companies Act are not exhaustive. Certain duties owed at common law and in equity, such as the equitable duty of confidence, have not been codified but remain in force.
Perhaps the most significant duty to keep in mind is the duty to promote the success of the company. This is a broad fiduciary duty which applies generally to every aspect of a director's role. It is a subjective duty of loyalty to the company, requiring the director to act in the way in which he or she believes, in good faith, to be in the interests of the company. In discharging the duty, directors are required to bear in mind the interests of various stakeholders, including shareholders, creditors, employees, and the community in which the company operates. Managing a business with the single aim of maximising shareholder value is, increasingly, insufficient.
Directors also owe a general duty to exercise reasonable care, skill and diligence, meaning that their performance is also assessed objectively. This obligation applies to a director's consideration of the interests of the stakeholders identified above.
Certain other duties, notably the duty to avoid conflicts of interest, will arise only in specific circumstances. Directors should adopt robust procedures for identifying the circumstances which may trigger these duties, to ensure that they are not inadvertently neglected - particularly when decisions are made under pressure.
The general duties described above will continue to apply to directors of companies which experience financial distress or become insolvent, even after the company has entered a formal insolvency process; indeed, the approach or onset of insolvency brings with it a further layer of duties and risks for directors.
Our insolvency specialist colleagues have written about duties owed, and considerations to be borne in mind, in the context of insolvency here. With respect to English companies, it should be noted that the UK Government has introduced the Corporate Insolvency and Governance Act 2020, discussed below.
When a company becomes, or is likely to become, insolvent (so, when a director can no longer be confident of the company's solvency on either a cash flow or balance sheet basis), directors will owe additional - paramount - duties to consider and act in the best interests of the company's creditors as a whole.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.