Directors’ duties and liabilities in financial distress during Covid-19
The Covid-19 pandemic and the economic crisis it has caused will have a large financial impact on many companies. Boards are struggling to ensure survival in the short term and to preserve cash, whilst planning for the long term in a world full of uncertainties.
Many directors are uncertain about their responsibilities and liability risks in these circumstances. They are facing questions such as:
- If the company has limited financial means, is it allowed to pay critical suppliers and leave other creditors as yet unpaid? Are there personal liability risks for ‘creditor stretching’?
- Can you enter into new contracts if it is increasingly uncertain that the company will be able to meet its obligations?
- What is the ‘tipping point’ where the board must let creditor interest take precedence over creating and preserving shareholder value?
- Are intragroup receivables subordinated in the face of financial difficulties?
- At what stage must the board consult its shareholders in case of financial distress, or even have a duty to file for insolvency protection?
- Do special laws apply in the face of Covid-19 that suspend, mitigate or, to the contrary, aggravate directors’ duties and liability risks?
There are more jurisdictions involved than you think
Most directors are generally aware of their duties under the governing laws of the country from which they run the company. However, they may also be directors of subsidiaries in other jurisdictions, either personally or indirectly through holding or management entities of which they are directors. And even if they are not, the laws that govern the subsidiaries may qualify them as shadow directors of a subsidiary. All this may expose directors to duties and liability risks at a local level.
To complicate matters, liability may arise not only under local company law but also under tort laws of countries where contracts are entered into that later cannot be performed, causing damage to the company’s counterparties. Insolvency proceedings may be opened in yet more jurisdictions where the company or its subsidiaries do business and local insolvency laws may contain specific directors’ duties and liability regimes.
We have put together an overview of the main issues facing directors in financially uncertain times in a number of major jurisdictions across the globe. You will find in this publication a brief general description of directors’ duties and key areas of potential directors’ liability in each country, as well as some answers to the questions listed above.
Obviously, the duties and liabilities that may arise will always be dependent on the circumstances. Therefore, this publication should not be used as legal advice when faced with a specific dilemma. However, we hope it may help to alert directors and their in-house advisors to the duties, pitfalls and liability risks that exist in major jurisdictions across the globe.