Directors Duties – Key Risks during COVID-19

Kerman & Co website
March 3, 2020 Advisory

Overview

In times of business difficulty, there are several obligations and duties that directors need to bear in mind when carrying on business. Breach of these obligations and duties could result in a director being disqualified from acting as a director, incurring personal liability and/or committing a criminal offence.

In the current circumstances, directors should closely monitor their cash resources and current liabilities, and be mindful of any risk that the company may become insolvent.  Where the directors know or ought to know that the company is or is likely to become insolvent, their duties shift to a primary duty to protect the interests of the company’s creditors rather than shareholders and other stakeholders.

Wrongful trading

If a director causes a company to carry on trading in circumstances where he or she knew, or ought reasonably to have known, that there was no reasonable prospect of the company avoiding an insolvent liquidation, and failed to take appropriate steps to minimise losses to creditors, he or she could be ordered by the courts to personally contribute to the company’s assets on an insolvent winding up of the company.

If a director believes he or she may be in such a precarious position, they should take professional advice (including legal and insolvency advice). They should also carefully document and justify all relevant decisions made by the board during any period of risk, including the reasons for entering into specific transactions and arrangements.

Update: On 28 March 2020, the government announced a temporary relaxation of the rules relating to wrongful trading.  For further information on the rule change see this article.

Fraudulent trading

If a director carries on business with the intent of defrauding actual or potential creditors, he or she could be personally liable to contribute to the company’s assets on an insolvent winding up. The key requirement is ‘intent’. From a practical perspective, a director can be deemed to have intended to commit fraud where he or she secures credit on behalf of a company in circumstances where he or she knows there is little likelihood of the company being able to repay that debt. As such, directors need to be careful when causing the company to borrower or secure trade credit.

Recovery for misfeasance

If a director misapplies or improperly takes assets from a company (including by way of dividend), it is open to a receiver, liquidator, shareholder or creditor of the company to recover money and/or damages from the officers of the company involved in the mismanagement/misfeasance.

Transactions at an undervalue

If a company disposes of an asset at an undervalue, it is open for a liquidator to set aside the transaction. For this reason, its appropriate for directors to appropriately value assets (taking professional advice where necessary) and record the reasons for disposing of assets at particular prices.

Fraudulent Preferences

A preference occurs when a company places one creditor in a better position than others in advance of an insolvency. A common example is simply paying one creditor ahead of others.  A liquidator can set aside preferential transactions that occur within six months of the company’s liquidation if it can be shown that payment was made with the intent of providing preference. If the creditor is a connected person, that 6-month period is extended to 24 months.

Disqualification

If a director is disqualified from acting as a director as a result of fraud, preference or transactions at an undervalue, they could face between 2- and 15-years’ disqualification from being involved in the management of any other company.

Legal Advice

If you are concerned about the solvency position of your company in light of the current economic environment, we recommend that you take legal and accounting advice.

For further information on any of the items mentioned in this article, please contact any member of our corporate team.

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.

Contact Us
  • Worldwide
  • Boston, MA
  • Denver, CO
  • Dublin, Ireland
  • Edwardsville, IL
  • Jefferson City, MO
  • Kansas City, MO
  • Las Vegas, NV
  • London, England
  • Miami, FL
  • New York, NY
  • Philadelphia, PA
  • Princeton, NJ
  • Salt Lake City, UT
  • St. Louis, MO
  • Washington, D.C.
  • Wilmington, DE
Worldwide
abstract image of world map
Boston, MA
800 Boylston St.
30th Floor
Boston, MA 02199
Google Maps
Boston, Massachusetts
Denver, CO
4643 S. Ulster St.
Suite 800
Denver, CO 80237
Google Maps
Denver, Colorado
Dublin, Ireland
Fitzwilliam Hall, Fitzwilliam Place
Dublin 2, Ireland
Google Maps
Edwardsville, IL
115 N. Second St.
Edwardsville, IL 62025
Google Maps
Edwardsville, Illinois
Jefferson City, MO
101 E. High St.
First Floor
Jefferson City, MO 65101
Google Maps
Jefferson City, Missouri
Kansas City, MO
2345 Grand Blvd.
Suite 1500
Kansas City, MO 64108
Google Maps
Kansas City, Missouri
Las Vegas, NV
1980 Festival Plaza Drive, Suite 750
One Summerlin
Las Vegas, NV 89135
Google Maps
Las Vegas, Nevada
London, England
Royal College of Surgeons of England
38-43 Lincoln’s Inn Fields
London, WC2A 3PE
Google Maps
Miami, FL
355 Alhambra Circle
Suite 1250
Coral Gables, FL 33134
Google Maps
Photo of Miami, Florida
New York, NY
7 Times Square, 44th Floor
New York, NY 10036
Google Maps
New York City skyline
Philadelphia, PA
2005 Market Street
29th Floor, One Commerce Square
Philadelphia, PA 19103
Google Maps
Philadelphia, Pennsylvania
Princeton, NJ
100 Overlook Center
Second Floor
Princeton, NJ 08540
Google Maps
Princeton, New Jersey
Salt Lake City, UT
201 South Main Street
Suite 750
Salt Lake City, UT 84111
Google Maps
Salt Lake City, Utah
St. Louis, MO
7700 Forsyth Blvd.
Suite 1800
St. Louis, MO 63105
Google Maps
St. Louis, Missouri
Washington, D.C.
1050 Connecticut Avenue NW
Suite 500
Washington, DC 20036
Google Maps
Photo of Washington, D.C. with the Capitol in the foreground and Washington Monument in the background.
Wilmington, DE
1007 North Market Street
Wilmington, DE 19801
Google Maps
Wilmington, Delaware