I’m the director of a company. What should I think about before accepting any of the funding that has recently become available?
Directors of a company that is in, or potentially facing, financial difficulty have a duty to act in the best interests of creditors as a whole. Failure to comply with that duty can have consequences for directors (including personal liability and disqualification if directors get it wrong).
The duty to act in the best interests of creditors as a whole begins when the company is (or in some cases is potentially or at risk of becoming) insolvent i.e. its assets are worth less than its liabilities and/or the business is unable to pay its liabilities as and when they fall due. However, just because a company is insolvent doesn’t always necessarily mean than an insolvency process is inevitable. Sometimes, the insolvency might just be caused by a temporary cashflow problem or perhaps wider problems in the business that can be overcome by making changes to the business itself.
In addition to that, the potential liability of directors ramps up even further when the company reaches the stage that the directors have concluded (or ought to have concluded) that there was no reasonable prospect of the business avoiding liquidation or administration. If the business reaches that stage, in addition to having to act in the best interests of creditors as a whole, directors can find themselves personally liable unless, from the time the directors ought to have reached that conclusion, they took every step that they ought to have done to minimise the loss to creditors. This is known as wrongful trading.
On the 25th June 2020, the government introduced new legislation – the Corporate Insolvency and Governance Act 2020 – which includes measures to temporarily relax the rules around wrongful trading with the proposed changes to take effect retrospectively from the 1st March 2020. Essentially, the changes say that any court looking at a potential wrongful trading claim against a director is to assume that the director is not responsible for worsening the company’s financial position between 1st March 2020 and the 30th September 2020. Whilst the wrongful trading rules have relaxed, directors still need to proceed with caution if the business is potentially insolvent as the new Act does alter other potential pitfalls for directors, like the risk of breaching their duties or allowing the company to enter into transactions that can potentially be challenged.
The support being offered by the government is potentially a lifeline for businesses under pressure through no fault of their own, but notwithstanding the recent changes to the wrongful trading rules it is still likely to be important for the board to carefully consider whether it is appropriate to make use of the loans, grants and tax forbearance that are on offer.
Exactly what the board should consider will vary from business to business and getting it right can sometimes involve balancing several different (and at times conflicting) priorities, challenges and concerns.
We have teamed up with Scaleup North East to help companies impacted by the coronavirus outbreak plan how to get back to business.
Our specialist lawyers will provide a free “diagnostic” call with eligible businesses across the NE, exploring challenges they are facing in the aftermath of the lockdown, and identify specific steps to survive, and then thrive, in these challenging times and beyond.
Through the collaboration with Scaleup North East, eligible North East-based SMEs are then able to apply for up to 40% funding towards up to £4,000 of legal advice.
These might include:
- Employment issues, such as dealing with a phased return to work
- Measures to support cash-flow, such as amendment to terms of trading and debt collection procedures
- Renegotiations and amendments to contracts, and other advice about contracts with suppliers and customers to deal with consequences of Covid-19
- Managing property costs – review of leases, advice on break clauses and formalisation of any revised arrangements recently put in place with landlords/tenants
- Health and safety implications of return to work and social distancing
Employers who have apprentices on fixed-term contracts due to end during the pandemic should discuss arrangements with the apprentices including whether an extension to the contract can be offered to allow them to complete their apprenticeship.
On 7 May the Government published guidance on how contracting parties can act responsibly in order to assist the effort to deal with Covid-19. The guidance seeks to persuade contracting parties to act reasonably and recognise the impact of Covid-19 on contractual counterparties. This will continue to be relevant as business begins to emerge from lockdown.
Put simply, if it is a requirement of a particular role that PPE is worn, then this should be provided to the employee. If an employer dismissed an employee for refusal to carry out their role due to lack of PPE then this is likely to be an automatically unfair health and safety dismissal.
Furthermore, anyone who is subject to a detriment as a result of raising a health and safety concern, e.g. someone in this situation who refuses to work due to lack of PPE and is sent home without pay, will also have a potentially valid claim in the Employment Tribunal for that detriment, even if they are not dismissed.
There is not currently a requirement for MHFAs to be DBS checked.