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.

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Gitta Altmann
Partner - Head of Company Commercial and Employment
(0)20 8349 5503
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Company and Commercial, Employment
Posted in covid-19.