Operating a company in the new business unusual

27 MARCH 2020

| 5 min read

The coronavirus pandemic and the daily changes in guidance are presenting companies and their directors with many challenges. Just planning for “business as usual” requires changes to one’s usual practices, involving a balance between compliance obligations, coping with financial stresses and following official public health advice to protect employees and yet maintain a sense of order – a new business unusual.

What changes for me as a director?

As a director, you know that you owe duties to the company and its shareholders and if the company is getting into serious financial difficulties, the board also needs to consider the position of creditors.

What does that mean in reality, though? How do you know what is best for the company’s shareholders? It is a notoriously difficult path to tread. On one hand, continuing to run the business may mean it survives and everyone may ultimately be paid in full. On the other, keeping going might make things worse for the creditors as the company runs up more debt.

It seems that business disruption due to coronavirus is inevitable. What should you, as a company director, be doing if the disruption means that your business starts to suffer?

When the business starts heading towards insolvency, there is a change of emphasis and instead of doing what is best for the shareholders, you have to change and consider what the consequences of your actions will be for the company’s creditors.

If this is your reality and business starts to seriously suffer, you should seek advice. You can see an associated note, prepared by Neil Smyth, which contains an in-depth discussion on what Directors should do during the Covid-19 pandemic when a business is in financial distress.

Some tricky decisions

While in this period of uncertainty, big decisions can be the difference between survival and collapse. For example, should you be entering into the new lease for new premises? It might bring better productivity and improved income streams. Equally, it may mean you are weighing the business down with more debt when it can’t take on much more.
When placing a new order, if you have doubts about whether the company can pay for it, this could mean you are heading for a breach of your duties.
Does the business have sufficient cash? Consider some of the new Government guaranteed facilities available for short-term cash-flow. But remember that this is money that is interest bearing and needs to be repaid, so will be a burden on your balance sheet in the long run.
Consider if any of your contracts (supplier or customer) have "Force Majeure” clauses that would entitle one side to declare them unenforceable due to the pandemic. Conversely, if you are relying on one of these to escape liability, you should take careful advice as they do vary drastically in their breadth.
You need to think carefully before making any payments. Paying everyone on time and in full may be a source of pride for you, but where things get tight, the wrong approach may get you into difficulties with your directors’ duties. At this time, cash is definitely king.

This is not a definitive list, but it gives you a flavour of some of the things you may have to think about and the way your mindset needs to change in this very fluid and unprecedented period.

Duties and liability of the non-executive director

Although there is no difference between the legal duties of a non-executive and an executive director, the knowledge, skill and experience expected of non-executive directors is likely to be different. Also their involvement in the company is likely to be different. In particular, the time devoted to the company’s affairs will probably be significantly less for a non-executive director than for an executive director and the detailed knowledge and experience of the company’s affairs that could reasonably be expected of a non-executive director will generally be less than for an executive director.

However, what is clear is that non-executives cannot simply sit back and take a passive role. Directors on the company’s board have both collective and individual responsibility for ensuring they are sufficiently aware of the company’s affairs in order to be able to properly fulfil their duties.

That this is an active obligation is demonstrated by a 2009 Court of Appeal case where two non-executive directors were liable for the dishonest misapplication of company funds by an executive director, because their inactivity whilst they were directors had caused the resulting loss to the company.

The directors had known that the executive director had previous criminal convictions for dishonesty. The court considered that they ought to have known that certain transactions shown in the accounts required convincing explanation, and should have been on their guard in relation to any attempt to explain.

Had they fulfilled their duty, the executive director would not have been able to satisfy them that the transactions were genuine. They then should have sought advice and informed the auditors and any other directors, which would have meant that the subsequent misapplications could not have been perpetrated.

Accounts and financial duties

As a director of the company you have a personal responsibility to ensure that accounting records are maintained so that at any time they are able to demonstrate and explain the financial position of the company. Failure to do this will cause every defaulting officer of the company to be liable to a fine, imprisonment or both.

In addition, it is your responsibility as a director to ensure that full annual accounts are produced each year and sent to all members within the required time. If it is proposed that the company takes advantage of certain exemptions in relation to the preparation of the annual accounts, you will also need to be satisfied that the company meets the qualifying criteria for such exemptions.

You also have a duty to deliver the annual accounts and reports to Companies House. Failure to submit the accounts within the required period carries an automatic civil penalty payable by the company in default, which increases according to how late the accounts have been filed. Companies House has recently published an ability to extend the time period for filing accounts but care has to be taken in getting within these moved goalposts.

Corporate governance must go on

Holding general meetings, particularly as we enter AGM season for listed companies with a 31 December year-end, is another challenge in the current environment. A number of listed companies are warning about the potential impact of coronavirus to their AGMs, given the general lock down and bans on mass gatherings. Planning ahead can help minimise disruption, and we have listed some key issues to consider.

Is it necessary to hold the general meeting?

Public companies must hold an AGM within six months of the end of the relevant financial year. If you are a director of a private company which is not a traded company, check its articles to confirm if it is required to hold an AGM.

What you should do: If it is not a requirement to hold a general meeting, consider if company business can wait or, for a private company, whether it can be addressed by a written resolution.
Notice of general meeting

An annual general meeting of a public company must be called on 21 clear days’ notice with other general meetings (of public and private companies) being called on 14 clear days’ notice. Always check the company’s articles to confirm deemed timing of receipt of the notice.

What you should do: To minimise risk of future challenge be aware of the impact of coronavirus on the ability to print and post notice of meetings and the effect travel restrictions will have on timing of actual receipt of notice. If shareholders have previously consented to receiving communication by electronic means, where possible take advantage of this consent.
Adjournment or postponement

Postponing or adjourning an AGM (after it being convened with a bare quorum) does not extend the six month window (from the end of the relevant financial year) in which it must be held. If, as appears likely, coronavirus has an impact throughout that period, adjournment or postponement may not have requisite benefit.

Companies must also consider that if a general meeting is adjourned or postponed, existing authorities may expire in the intervening period. Existing authorities (for example to allot shares) which are time limited are not extended by an adjournment or postponement.

What you should do: Check your company’s articles to understand if adjournment or postponement is possible. Consider if any such adjournment (subject to legal deadlines) could take you into a time period when the severity of the impact of coronavirus is likely to decline. Identify any authorities that might expire during the period of adjournment to determine if any are necessary for the company to continue its business as normal.
Meeting in person
Where a physical meeting in person is the only option, companies should discourage attendance in person. Quorum requirements for most companies are low, so limited physical attendance should not be a bar. Consider also ensuring that in any public space there is sufficient area to ensure the safe spacing of two metres can be observed.

Where general meetings are regarded as fundamentally important to the exercise of shareholder rights and the accountability of a company’s board, companies should encourage shareholders to:
- submit proxy votes in case they cannot attend in person
- clarify alternative ways for attendees to submit questions ahead of the meeting
- make arrangements for live streaming of the meeting using one of the various streaming platforms
Where companies require employee/director shareholders to attend a meeting in person to ensure a quorum is present, they should note that their normal duty of care (as an employer) to protect the health and safety of employees will continue to apply.
Virtual meetings
Current conditions dictate an increase in business conference calls, dial-ins and the use of web browser/app technology in order to communicate in real time. For a trading company, particularly one in a regulated sector, this can be subject to proportionate restrictions to enable the identification of shareholders and the security of electronic communication.

English company law permits virtual meetings and a company’s articles must not directly or indirectly prohibit them (for example, by containing a notice requirement to specify a place of meeting). Ideally a company’s articles should expressly permit virtual meetings, but for listed companies, the Investment Association has not historically supported such changes (favouring a hybrid meeting), which it is felt could make company boards less accountable. However, we are now operating in changing times, and this stance may evolve.

In addition to the here and now, what can companies do to prepare themselves for comparable events in the future? Options include:
- where necessary, obtaining shareholder consent to electronic communication
- consider making changes to the company’s articles to ensure that the ability to hold a hybrid general meeting or virtual general meeting is available (whether or not in limited circumstances) in the future
- where the company has institutional shareholders, whether public or private equity shareholders, the inevitable jitters they may be feeling by being one step removed from the business is best headed off with a (more) regular feed of information and financial projections emphasising cash receivables and payables and the management of liquidity.

Further information can be found in our article Corporate Governance in difficult times – who can do what?

As the coronavirus situation is rapidly evolving, our advice may change in light of government announcements and on-going developments; please consult our hub for our latest thinking.

Contact

Peter McLintock

Partner
Peter McLintock

Partner
- 01865968570
- +(44)(0)7881 582349
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