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Covid-19 and Directors’ Obligations

By August 25, 2020November 28th, 2023No Comments

COVID-19 has created chaos across the board. Everyone has had to learn how to adapt in the circumstances and this has presented a number of challenges. Apart from the daily life disruption, the pandemic has increased the stress on a number of businesses. Very few have sailed by unaffected and even those which faced a minimal or negligible impact have had to ensure that they are on the look out for any changes that have to be integrated.  

Directors of companies are a sphere of business that have had to adapt to the changes being made by the pandemic. The adaptation has had to take place not only in relation to the business operation of a company but also to the legal obligations that the directors have towards the company and third parties. 

The immediate concern of any company director, upon the spread of the pandemic, was the viability of the business itself. This was obviously determined by the area in which the business operated. After assessing the situation the board of directors should have taken decisions in the best interests of the company but with particular attention to the company’s obligations in relation to creditors and other third parties.

Despite the difficult scenario companies might be facing the board of directors must ensure that the their obligations are being satisfied in full as this might lead to personal liability, part from liability for the company itself. This is important to underline as many companies when faced with a stressful period tend to focus on the cash aspect of the operations and put on the back burner any other obligations that the directors or the company may have.

Understandably, in a crisis the focus is firefighting, however there may be other problems looming which the directors may not be seeing. For this purpose, it recommendable that the board of directors always has the proper support mechanisms to ensure that, when adverse situations do occur, the run of the mill obligations are fulfilled by the company. For example, the directors should ensure that the company has a good finance department or an accountant in place to continue taking care of the periodical fiscal commitment of the company such as VAT returns, submission of monthly tax and social security declarations etc. This will avoid the directors from being exposed to administrative penalties and other serious consequences that the directors may be faced with.

The COVID-19 pandemic has also shown us that a Board of Directors should also have some foresight when taking decisions. Living for the day is never recommendable in today’s business world and companies should ensure to have enough reserves to pull them through a reasonable stretch of turmoil. Some family businesses, as an example, tend to milk completely the cow at every possible opportunity. These businesses have now realised that the retention of reserves help in the longevity of the company. This is particularly relevant in the light of greedy shareholders who simply look at what they may derive from their shares without looking and the sustainability of the company. These type of shareholders tend to put pressure on the directors to liquidate all possible profits from the company in their favour. The pandemic has now shed light on situations like these and directors should take heed of this experience by standing their ground with inconsiderate shareholders.

Any director should be guided by the principles of integrity and honesty and should always ask themselves: ‘how will the company benefit from their decisions?’ Decisions taken in favour of the company will not necessarily translate immediately into benefits for the shareholders. This nevertheless should not block the directors from taking certain difficult decisions.

In the event of the insolvency of companies, creditors will scrutinize in detail the actions of the directors and the concepts of fraudulent and wrongful trading as provided for by the Companies Act, may come into play. Directors will want to avoid being accused of taking on commitments that the company knew it was not able to fulfil. Furthermore, in situations that could lead to insolvency the Directors should steer away from giving particular attention to a particular creditor rather than to the general pool of creditors. All decisions must be assessed on what a court of law would deemed to be a reasonable action by the director. If in doubt the board of the directors should seek professional legal assistance on determining the test required by law when taking such decisions. Once the decisions are made it is difficult to undo their consequence if the company becomes insolvent. Therefore, utmost due care should be exercised.

The challenges of the pandemic have also created difficulties for the physical meeting of the board of directors. Whilst technology is a great help for virtual board meetings, one must keep in mind that for the purposes of control and management of the company it is always highly recommended that physical meetings continue to take place. The impossibility of meeting due to travel restrictions has made its reasonable to have virtual meetings for company decisions to be taken far from the jurisdiction in which is operates. However once travel resumes the board must keep in min the elements of what constitute the control and management of a company and must ensure that decisions keep being taken from within the jurisdiction where the company retains its fiscal residency.

Where in doubt seek professional help. The board of directors of a company may not be equipped with all the knowledge required to solve every single issue that crops up. It will however be expected to tackle challenges and difficulties when faced with them rather than bury one’s head in the sand. Therefore assistance should be sought whenever required.

Cedric Mifsud is a Partner of Mifsud & Mifsud Advocates and head the Commercial Law Department of the Firm

This article may also be accessed on the Commercial Courier