Directors’ duties in uncertain times

With the news that existing winding up petitions will be adjourned to at least 17 June 2020 with other petitions now unlikely to be heard for a number of months, it will no doubt provide directors and business owners with some welcome breathing space whilst cash is tight. In addition, the Government have confirmed that VAT payments are deferred until June, with self-assessment payments due in July in respect of income tax also deferred until January 2021.

During the good times, directors have a fiduciary duty to maximise wealth for shareholders. When faced with financial distress, their duty as a director swings to stakeholders as a whole, including creditors (i.e. those people to whom you owe money), rather than just the shareholders. Whilst it is unlikely that there will be external pressures to meet payments on time, at least for the short term, given that petitions will not be heard, this does not mean that directors are absolved of all responsibility and can avoid thinking about stakeholders altogether. 

Managing your cashflow requirements over the short term is now a necessity – not only will it ensure that you can identify what payments you are able to continue to maintain, it will also allow you to monitor those which have been postponed for the meanwhile. Keeping on top of this list will be of vital importance if your business intends to come out of the other side unscathed.

There is currently talk about relaxing the rules around wrongful trading for a period, which has already happened in other parts of the world, as Governments try to keep the economy moving. Wrongful trading occurs when a director continues to incur debt and/or credit when a reasonable person should have known that there was no prospect of avoiding insolvent liquidation. It makes sense to relax these rules for the time being as there is currently no set date by when we are expecting to turn the corner at present. However, failing to look after the interests of all of your stakeholders will continue to get you into hot water – this is called misfeasance and occurs when directors breach their fiduciary duty.

So how do you ensure that you maintain your duties as a director during these uncertain times? Here are some top tips (although the list is not exhaustive):

  1. Treat everyone fairly – do not prefer certain creditors to others, unless you have agreements in place that their payments have been postponed for the time being (such as HMRC). You should ensure that no one is put in a better position than others. 
  2. Make sure any disposals are carried out at arm’s length and for proper value.
  3. Do not take on any new lending unless you know that you will be able to maintain the repayments.
  4. File note decisions that you make in respect of your business.
  5. If you are unable to meet a payment obligation, communicate with the person expecting the payment to explain why – the earlier the better.
  6. Consider whether you will be able to meet a commitment for new work before you agree to do it.
  7. Maintain a cash flow forecast to monitor your cash.
  8. Ensure that your insurance cover is maintained.
  9. Communicate, communicate, communicate.

Mike Kienlen, partner and chairman, Armstrong Watson LLP

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