Coronavirus and the duties of businesses and directors

Although the day-to-day workings of most businesses and their directors have changed, their obligations and duties remain the same.

The Government is doing its best to clarify many of the uncertainties around the regular statutory duties and responsibilities of a company and its directors, but there are still many more questions that businesses have.

To offer some clarity in a world of confusion, we have looked at a number of key points and considered the latest advice. 

Directors 

Directors normally have certain obligations to a company and its shareholders that they must fulfil. However, in difficult times such as these, where financial distress is more likely, directors must also consider their responsibility to creditors.

This can create an extremely difficult balancing act, between ensuring a business remains functional and survives and not making things worse for existing creditors by creating new debt.

The Government has already stepped in to help directors stuck in this position by softening insolvency rules around liabilities for wrongful trading to ensure directors won’t be penalised personally if they place the needs of the business before creditors to ensure people remain in work and a business can continue to operate. 

Nevertheless, where a business starts heading towards insolvency, there should be a change of emphasis to consider what the consequences of a company’s actions would be on its creditors.

Non-Executive Directors 

Non-executive directors cannot take a passive role if their company faces collapse. Although they may take a less active role all directors on a company’s board have both collective and individual responsibility for ensuring they are aware of the company’s affairs so that they can fulfil their duties. 

This is a point that has been tested in the Court of Appeal, where non-executive directors have previously been held liable for the dishonest misapplication of company funds made by an active director, where they were unaware of how the company was functioning and failed to act to report illegal activity.

It is important that during these difficult times, non-executive directors take a more active role in a business and keep abreast of all changes so that they are properly informed and can report concerns to auditors and other directors.

Dividends 

Several major banking institutions have already announced that in the current climate they will not be paying dividends to shareholders.

This sector is not alone in considering whether the payment of dividends is appropriate and viable considering the difficulties that many businesses face. 

Where a dividend payment has already been announced, a board will rarely adjust its intentions due to the negative impact on investor relations and the potential for causing upset in the market. 

However, businesses should also consider the ‘court of popular public opinion’ and the survivability of a company, which may lead them to cancel previously announced dividends.

Whether a board is able to do this with relative ease will depend on the type of dividend agreed upon. An interim dividend is decided on and announced by directors, which only becomes a binding obligation to shareholders once it is actually paid.

Alternatively, a final dividend is one which is recommended by directors to shareholders that is approved by shareholders via an ordinary resolution and which is binding at the point of approval. 

This latter classification of dividend may be more difficult to cancel and could be more likely to lead to action through the courts or other legal disputes, which is something businesses should be aware of.

AGM

Listed companies and organisations ran via a trust are often required to hold an AGM. Already many directors and trustees have raised concerns about the public health risk of holding such a meeting given the Government’s own ‘Stay at Home’ advice.

Most company articles will provide that only shareholders that are “present” can count towards quorum or can vote. To be “present” is often stipulated to mean that the person(s) have to be in a single location where the AGM is held. 

Many companies are already exploring the use of technology in light of the current limitations and seeing whether the use of video and audio conference technology could be used to hold an AGM, without the need for shareholders to be present.

It should not instantly be assumed that a company’s articles will allow this and shareholders should discuss whether they will allow a meeting to be held this way and amend existing articles. It is not always straightforward to amend a company’s articles in this way and so other options should be considered. 

The Chartered Governance Institute (ICSA) has issued guidance along these lines that suggests a minimum number of shareholders could be present at the specified location to meet the criteria, as long as they follow social distancing rules, with an allowance for other shareholders to join the meeting using technology, thus meeting the requirements for quorum and voting found in many company articles. 

Such a meeting should merely address the formal business and close. ICSA believes this would constitute “essential work” that could not be undertaken from home.

The Government is also to issue guidance shortly regarding the holding of AGMs in compliance with lockdown restrictions, which may temporarily permit online AGMs or postponing such meetings.

The Coronavirus Large Business Interruption Loan Scheme (CLBILS)

The Government has announced a further scheme to support businesses through the Coronavirus crisis.

The Coronavirus Large Business Interruption Loan Scheme (CLBILS) is aimed at large businesses with annual turnovers of between £45 million and £500 million.

These businesses cannot access facilities through the Coronavirus Business Interruption Loan Scheme (CBILS), which is limited to companies with a turnover below £45 million, or the Bank of England’s COVID Corporate Financing Facility (CCFF), aimed at the very largest businesses.

Like CBILS, a Government guarantee of 80 per cent will be provided to enable banks to lend in circumstances where they might not otherwise be able to.

Unlike CBILS, which only provides loans of up to £5 million, CLBILS will provide loans of up to £25 million.

However, while CBILS provides loans that are interest-free for 12 months, CLBILS loans will be provided at normal commercial rates of interest.

Further details of how to access the scheme will be announced by the Treasury later in April.

It is strongly advised that you take independent legal advice when taking on a loan, particularly where a personal guarantee is requested.

Homeownership housekeeping during Stay at Home

With the current Stay at Home requirements strictly limiting the circumstances in which any of us can leave our homes, there has rarely been so much of an opportunity to engage in the kind of housekeeping tasks that can be difficult to get around to.

Indeed, investing some time now in certain tasks can pay dividends when it ultimately comes round to time to sell-up, or in other circumstances.

To help you make the most of time that would ordinarily be spent out and about, we have put together the following tips:

Lease extensions

If you own a leasehold property with less than around 85 years remain on the lease, it is time to consider extending the lease. Leasehold properties with less than 85 years left on the lease can be difficult to sell and may fetch a much lower selling price than they otherwise expect to attract. A leasehold property with less than 70 years’ remaining on the lease can be impossible to mortgage.

The process involved in extending the lease on a property varies depending on whether it is for a house or a flat.

Contact us today for detailed advice.

Buying your lease

If you own a leasehold property, you may wish to consider buying the freehold of the property. Where you live in a flat, you will need to do this with your neighbours.

If you own a leasehold house, you can generally seek to buy the lease from the freeholder after you have owned the property for two years.

Ensuring that you can obtain the best deal can be complicated and requires a knowledge of the processes involved.

Contact us today for advice on purchasing your lease.

Transfers of Equity

How you own your property can make a big difference to how well it serves your interests and those of your family, beyond providing shelter.

If you want to change the legal ownership of a property, whether as a consequence of marriage, divorce, cohabitation or for tax planning reasons, you will need a Transfer of Equity.

The Transfer of Equity process is complex and requires detailed legal advice.

Contact us today for advice on a Transfer of Equity.

Claim adverse possession

Adverse possession exists where you are somehow occupying land that you are not entitled to use.

Simply put, adverse possession allows you to claim rights to a property or land because you have been using it constantly for some time.

Adverse possession could relate to the use of a private road or a driveway, for example, or other land within your property that might have been fenced-in in error in the past.

Ensuring that the land you use as part of your property is properly registered in your name can be vital when it comes to selling up. Confusion over the extent of the property’s boundaries or the rights associated with the property can lead to significant delays and added costs in the conveyancing process, or could even see your buyer refused a mortgage or pull out of the transaction.

Adverse possession does not mean that ‘possession is nine-tenths of the law’ and the rules that apply are complex and very specific in how they should be applied.

If there is land within your boundaries or that you use to access your property that you have any doubt over the status of, please contact us today for advice.

Contact us today for advice on all aspects of residential property law.

Companies House announces an extension for late filing of accounts

In the light of the current COVID-19 pandemic, and companies focusing their time on trying to keep their business afloat, Companies House has announced that businesses will be able to apply for a 3-month extension for filing their accounts.

Generally speaking, if a company is late in filing their accounts, Companies House will automatically issue a penalty notice and the later the accounts are filed after the deadline, the higher the amount of the penalty. Once issued, a late filing penalty can be appealed against. However an appeal will only be successful in very limited circumstances and companies wishing to appeal must:

  • give a specific reason for not filing their accounts on time
  • include all relevant details, such as dates and times
  • prove the circumstances were out of the company’s control, for example a fire destroyed their records a few days before their accounts were due

This joint initiative between the Government and Companies House will mean businesses can prioritise managing the impact of COVID-19.

It is very important to note that companies will still however, have to apply for this extension as it does not come into effect automatically for all companies. Failing to apply in time means companies risk having their name struck off the register.

How long does it take for before a company is struck off for non-filing of accounts?

The procedure and timing of this is set out in section 1000 of the Companies Act 2006. This requires the Companies Registrar to send at least two formal letters to the company in default, and if no reply is received to either letter, publish a notice in the Gazette to inform the world at large that the company will be struck off two months after the date of that notice. The process usually takes around four months. A company has 14 days to respond to the first letter, failing which, the Registrar will, within 14 days send the second letter. 14 days after sending the second letter, the Registrar will in the absence of receiving a reply, publish a notice in the Gazette, two months after which, the Registrar can strike off the company.

How likely is a company to get an extension?

Companies House say that any company applying for an extension citing issues around COVID-19 will be automatically and immediately be granted an extension. Companies can apply through a fast-tracked online system which is stated to take just 15 minutes to complete.

UK firms struggling to access CBILS may run out of cash

The latest data from several business organisations, including accountants, suggests that as many as one in five businesses may run out of money within a month despite Government’s measures to assist them.

The research suggests that between 800,000 and a million firms across the UK are at risk of closure, in some cases because banks have refused to lend them money via the Coronavirus Business Interruption Loan Scheme (CBILS). 

The CBILS was introduced by the Chancellor Rishi Sunak with the promise that small and medium-sized businesses, with turnovers up to £45 million, could access emergency finance to help them survive the difficult economic situation. 

At the time it was said that any ‘good’ business in financial difficulty would be able to access up to £5 million of Government-backed loans to cover the day-to-day costs of running a business.

However, evidence now suggests that thousands of firms in difficulty are unable to access the CBILS because they aren’t able to contact their bank due to the volume of enquiries or because they have been told they are ineligible. 

The loans were meant to be offered at attractive rates to businesses and the Government has promised to pay the first 12 months of interest on the loans, which they have guaranteed up to 80 per cent. 

Despite this promise, those applying for loans have been told that they face interest rates of up to 30 per cent in future from some of the specialist lenders, while many of the high street banks are still charging around seven per cent, despite the Bank of England base rate being at its lowest point ever at just 0.1 per cent. 

Although CBILS are being administered with the help of the British Business Bank, it is down to individual lenders to set terms and conditions, which may differ from one lender to another. 

This is causing frustration amongst small businesses who are being told by lenders that they are following rules set by the government. This means that emergency loans can only be granted if a business can’t borrow in a normal commercial way, like borrowing against the value of a property.

On top of this many directors are being asked to sign personal guarantees for loans over £250,000, which may put personal assets on the line if the loan cannot be repaid. 

The Business Secretary, Alok Sharma, has since issued a warning to the banks and lenders to support small businesses in their time of need. 

He said it would be “completely unacceptable” for them to refuse financial support to “good businesses” which need it after the public and businesses had effectively bailed the banks out through public funding during the financial crisis of 2008. 

Before applying for a loan via the CBILS it is important that you can evidence your claim and it is advised that you seek professional advice.

Newly appointed staff members will not benefit from the Coronavirus Job Retention Scheme

Thousands of employees who have started a new job after the 28 February 2020 will not be able to benefit from the Coronavirus Job Retention Scheme (CJRS) and may need to be laid off or sacked to help businesses cut costs.

To be eligible for the scheme, which covers 80 per cent of a furlough workers employment costs up to £2,500 per month, an employee must have been on their company’s payroll on 28 February.

The loophole in the Government’s much-lauded measure means that newly appointed staff members will not have their wage covered and will instead have to rely on their employer paying them.

As many companies are looking at ways to reduce their costs during this challenging period fears are growing that many will have no other option but to lay new employees off or terminate their employment, as long as they are allowed to do so under existing employment law. 

Treasury guidance states that employers can re-hire staff that have already been made redundant and still claim the subsidy. 

However, it is understood that the CJRS doesn’t apply if the worker has voluntarily left their post already. 

A Treasury spokesperson said that those who are not eligible for the scheme “will be able to access a range of other support – including an increase in the Universal Credit allowance, income tax deferrals, £1bn more support for renters and access to three-month mortgage holidays”.

Mortgage lenders limit new lending amid coronavirus measures

Several of the UK’s largest mortgage lenders have restricted the number of products they are offering to those with larger deposits.

Nationwide has said that it will now only offer mortgages to people with deposits of 25 per cent or more, Santander and Skipton have taken similar measures.

Others, including Barclays, Halifax, Virgin Money and The Family Building Society are requiring deposits of 40 per cent.

The move has been prompted by difficulties in carrying out surveys – which can be critical in assessing riskier loans – as well as reduced staff numbers and increased enquiries from existing customers wanting to remortgage or take advantage of the industry-wide offer of a three-month payment holiday.

Robert Rosenberg, Partner in our Property, said: “This is not surprising news. We are entering a time when the housing market will be rocky.  It will be rocky as those who have already exchanged desperately try to complete over the next 4 weeks – a usually stressful time, made even more stressful. Behind this group, is a queue of people almost ready to exchange. Most of them will have been told not to exchange as the risk of moving problems is too great – including significant mortgage delays and the closure of many removal firms following the Government’s lockdown measures.

On the future of the UK property market, Michael Stock, Head of the Property team, said “Whilst lenders are being prudent, it highly unlikely to have any impact on the mortgage and property market unless until there can be unconditional exchanges of contracts. For the foreseeable future, property solicitors will have to consider with their clients, whether to insert pretty unworkable and unsatisfactory contingency provisions, to cover a variation or termination of a contract, if the outbreak is still prevalent at a proposed completion date. In view of the uncertainty that these type of clauses create, the invariable legal advice is for anyone looking to borrow is to to wait, which unfortunately, will result in current mortgage offers expiring and not being renewed by lenders.”

Also, it is and will continue to be extremely difficult to obtain any mortgage offer, given the uncertainty about a borrower’s future earnings. Even in those extremely rare cases where earnings are secure, valuers currently unable to inspect a property to provide the lender with a valuation (unless a lender is prepared to accept a “ desktop “ valuation ), resulting in the mortgage and property market in limbo.

Accordingly , unless and until freedom of movement returns, with people being able to get back to work physically, this is extremely unlikely to change. However, I anticipate that, even when that happens, prudent lenders might still wish to “wait and see” (at least 3-6 months ) if there is improvement in the employment and property markets and, if there is, they may then decide to revert to 75 per cent loan to value mortgage offers.”

Crucially, the move does not affect existing mortgage offers and so should not have an impact on transactions where all parties in the chain have already secured their mortgage offer.

Domestic abuse victims can still leave home, Government confirms

The Government has confirmed that victims of domestic abuse do not need to stay at home with abusive partners.

In an article in the Mail on Sunday, the Home Secretary, Priti Patel, said that domestic abuse victims may leave home to seek help at refuges.

She also said that abusers would not get away with their crimes.

People who are in immediate danger can still dial 999. If they are unable to talk, they can dial 55 to connect to the police.

The Government’s Stay at Home advice had prompted warnings from police about the potential for the measures to make victims of domestic abuse more vulnerable.

Coronavirus and divorce

Each January, we see a flurry of press reports claiming that the first working Monday of the New Year is the peak day for enquiries to solicitors about divorce proceedings – something often attributed to spending much more time at home with each other than usual during the Christmas and New Year break.

Unsurprisingly, this has led people to speculate that the coronavirus crisis could lead to an increase in divorces, given that couples who may already be experiencing difficulties in their relationships are required to stay at home together for much of the time.

I am considering divorcing

The coronavirus crisis has seen the Stay at Home requirements come into effect at a time when major changes to divorce laws are being considered by Parliament.

As it stands, one party can petition for divorce and must show one of the following to demonstrate that the marriage has broken down irretrievably:

  1. a) unreasonable behaviour
    b) adultery
    c) a period of separation in excess of 2 years if both parties agree
    d) a period of desertion for 2 years
    e) a period of separation in excess of 5 years, where it does not matter if one party objects or not.

The new law is expected to remove the requirement to give reasons and will only require the applicant to confirm that the marriage has broken down irretrievably – a measure known as ‘no-fault divorce’.

It had been expected that this change would come into effect this year. However, the change may be delayed by the impact of coronavirus. The new law may mean that the requirement for two year’s separation has no effect if it comes into force sooner than two years’ from now, as seems likely.

I am living with a partner I wish to divorce

If you are having to follow Stay at Home advice in the same home as your spouse, you should seek opportunities for time apart, whether in different rooms or one of you spending time in the garden.

It is also important to try, as far as possible, not to say things that you regret in the heat of the moment, while confined together.