Directors’ Duties in Uncertain Times

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.

Cash flow management

Managing your cash flow 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, but 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.

Wrongful trading

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. These rules have been relaxed until 30 April 2021 and until this date directors will not be held to be personally liable in respect of any potential wrongful trading action. However, it should be noted that 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.

Handy hints

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 cashflow forecast to monitor your cash.
8. Ensure that your insurance cover is maintained.
9. Communicate, communicate, communicate!

It is very easy to forget about your overarching responsibilities and duties as a Company director in these uncertain times. If you need further advice, please get in touch with our team who will be able to provide you with assistance and guidance.