The UK Business Secretary recently announced a temporary suspension of wrongful trading rules, meaning that company directors would not be personally liable for their decisions during the COVID-19 pandemic. Whilst plans are in train to adopt equivalent measures in Jersey, the legal position in Jersey remains that a director has a duty not to allow the company to trade if they know (or is reckless as to whether) the company will not avoid insolvency.
Where a director or former director has allowed a company to trade while insolvent the court may order that such director be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company arising after the time specified by law.
A director will be excused if they took reasonable steps to minimise the potential loss to creditors. Accordingly, as soon as a director becomes aware that there is a real risk of insolvency, then they should to take reasonable steps to protect the creditors’ position (and seek to avoid personal liability).
Directors should exercise caution during this time. Boards of companies in financial distress may consider taking the following, practical steps, which will go some way to counter any arguments of “recklessness”, should these be advanced at a later date:
- continue to hold regular board meetings (albeit remotely, if permitted under the company’s articles) and increase the frequency of such meetings should the financial position of the company worsen;
- carefully minute board meetings and document decisions being taken, giving a clear rationale for these decisions;
- interrogate the financial position of the company – how have items been accounted for? Is this accurate/realistic? What is the likelihood of any contingent liabilities crystallising in the near future?
- engage with creditors – a lender approached in good time will have more options available to it to be able to offer support;
- take appropriate professional advice; and
- prepare contingency plans, agreeing trigger points and ultimately ensuring the timely winding up of the company should this become necessary.
If businesses are unable to weather the storm, directors should ultimately do all they can to ensure that their conduct in the run up to a formal insolvency process cannot be challenged or criticised. It is important to note that, whilst some directors may consider resigning in the hope that this will extinguish any liability going forward, this could actually increase the director’s potential liability if they have failed to act in the best interests of the creditors as a whole.
One of the major difficulties with the current COVID-19 pandemic is the ongoing uncertainty. It is impossible to say with any certainty when “normality” will be restored and what the new normal will look like. What is certain is that a dynamic management team that carefully monitors the situation and keeps all stakeholders fully apprised will be best placed to protect the interests of creditors and shareholders thereby mitigating the risk of any personal exposure. Seeking professional advice will evidence reasonable steps being taken by a well-informed board, which will ultimately assist both directors and viable companies alike.