Directors’ Duties and COVID-19
The Companies Act 2006 imposes certain statutory duties on directors of a company. These duties are detailed below and we will examine key duties in further detail, in light of how these may be adhered to during the current COVID-19 epidemic.
- Duty to act within the powers detailed within the company’s constitution;
- Duty to promote the success of the company;
- Duty to use independent judgement;
- Duty to exercise reasonable care and skill;
- Duty to avoid conflicts of interest;
- Duty not to accept 3rd party benefits; and
- Duty to declare an interest in a proposed transaction or arrangement.
(further detailed at s.171-177 of the Companies Act 2006)
Of key importance at the present time, are the duties to promote the success of a company and to exercise reasonable care and skill in the decision making process.
The duty to promote the success of a company is likely the most widely known director duty. The obligation placed on a director is to act in a way which the director considers in good faith, would be most likely to promote the success of the company for the beneﬁt of its shareholder(s) as a whole. When making decisions, directors must also give consideration to the potential consequences for various stakeholders i.e. employees, suppliers, customers and the community. They should also consider the reputation of the company and the potential impact on the success of the company in the long term when making such decisions.
Government guidance on director duties notes that directors should be broad minded in the way that they evaluate those interests – paying regard to all stakeholders rather than adopting a narrow financial perspective. This is a key consideration for directors, particularly given the current Government advice for businesses to seriously consider the financial packages which have been made available in response to the economic stagnation created by the shut-down of the vast majority of businesses to combat the COVID-19 epidemic. Such financial packages have been created as a means to mitigate against companies having to lay off employees in the short term given the likely financial bottleneck many business will face in the coming months. Therefore, in discharging such duties, it is imperative that prudent decisions are made by directors encompassing all available information and with consideration to all shareholders and stakeholders.
The duty to exercise reasonable care and skill is to reflect that which would be exercised by a reasonably diligent person with:
- The objective test of the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as the director in relation to the company; and
- The subjective test of the general knowledge, skill and experience that the director actually possesses.
The expected standard is measured against both these yardsticks and of significant consequence in this measurement is that a director’s actual understanding and abilities may not be enough if more could reasonably be expected of someone in his or her position.
Given the uncertainties surrounding the COVID-19 pandemic and the ever-evolving advice being provided by the Government, directors should take extra care to ensure that they exercise all reasonable care and skill in their role and that all decisions made and actions taken are for the long-term success of the company, its shareholders and stakeholders. Given the fluid nature of this crisis and the need for reactive and flexible leadership, directors can mitigate risks by carrying out acts in good faith and in accordance with current advices from the Government and other governing bodies, ensuring informed decision making is adhered to.
Such matters for consideration by directors should include effective communication between all parties – director to director, director to shareholder, director to stakeholder and contingency planning (as far as reasonably possible in these ever-changing circumstances).
Please note this is a brief overview of the potential issues in compliance with director duties during the COVID-19 crisis. Given the ever-evolving nature of the crisis, specific legal advice should be sought from a professional advisor and tailored to your particular circumstances.