Managing directors’ potential liabilities and good governance

Coronavirus has brought about unprecedented and challenging times that have resulted in insolvency laws being relaxed for an initial three-month period. In these uncertain times, business decisions will be subject to increased scrutiny. It is critical that directors consider their broader duties and the long-term impact of their decision-making to ensure they do not expose themselves to the risk of personal liability.

While the relaxed insolvency laws give directors the ability to trade while insolvent and not face action, good corporate governance should still be in place. Consideration should be given to Section172 Companies Act 2006 which sets out some of the matters a director must have regard to to comply with their statutory duty.

Directors should seek professional advice and take practical steps to ensure they make the best and most informed decisions for their businesses, including:

• Meet regularly and keep minutes of all meetings to demonstrate the decision-making process.
• Keep financial information up to date, ensuring there is accurate forecasting.
• Closely monitor financial covenants and speak to lenders about existing debt and any future requirements.
• Consider the impact of Coronavirus on the financial statements and extend the deadline for filing financial information, if necessary.
• Satisfy obligations relating to the care of employees and safeguard their health and wellbeing.
• Consider whether existing corporate insurance policies adequately cover business interruption.
• Review existing commercial contracts and establish whether contractual obligations can be met.
• Continue to give cyber security priority at a time when increased Coronavirus phishing scams are being reported.

Consideration needs to be given by the board if adequate business resilience plans are in place. Should directors be found to breach their duties, they could be exposed to claims which could lead to civil action. It is possible that directors, or indeed the company itself, may hold directors’ and officers’ liability (D & O) insurance which could indemnify them against such action.

Moore Kingston Smith has the expertise to advise and discuss any of the issues above and our team of specialists are available to help and support you and your business.