Directors’ Duties and COVID-19 – Extra Protections for Companies and Directors
On 3 April 2020, the Government announced further proposed changes to legislation in light of COVID 19, this time in relation to duties under the Companies Act.
While the specific form of the legislation is yet to be introduced, the key changes are:
The intent of these changes is to help provide some certainty and practical assistance to business owners, and should not be seen as way to get around obligations to creditors. Other protections will remain in place, including those around serious breaches of good faith.
Safe Harbour Provision
Under the Companies Act, directors have a number of duties that they must comply with. In particular:
These duties are likely to cause some real issues for companies and directors of companies that are facing liquidity issues because of COVID-19. Because of the potential for personal liability, directors are likely to act in a risk averse way and companies that would otherwise be solvent may well be liquidated. For this reason, the Government has proposed a “safe harbour”.
The proposed “safe harbour” would provide protection for directors who take on obligations or decide to continue trading over the next six month, providing the following conditions are met:
Key protections and duties under the Act in relation to the dishonest incurring of debts and addressing serious breaches of the duty of good faith will remain in place.
These changes are subject to the approval of Parliament. If approved as suggested, they will also have retrospective effect, backdated to 3 April 2020.
Debt hibernation would allow companies to enter into a moratorium on the payment of debts.
In order to place a company into a debt hibernation, the directors will need to consider whether the company reaches a threshold test. The details of this threshold test have yet to be spelled out.
If the directors consider that the threshold is met, they will need to notify creditors that they are seeking a six month moratorium. Creditors will be able to vote, and if 50% of creditors (by number and by value) agree to the moratorium, they company will be placed into debt hibernation. The company will be able to continue to trade and any payments during the moratorium will be exempt from the voidable transactions regime provided that:
This scheme should provide directors with some confidence going forward to be able to trade through the current environment.
The legislation to formalise these changes has not yet been introduced to Parliament, so it remains to be seen how some of the more specific mechanics will operate. Any changes to legislation are also subject to the approval of Parliament and it is possible that the final form of the legislation may be different to what has been proposed.