COVID-19 - Trading during COVID-19 and director’s duties - Recent guidanceMonday, 08 June 2020
On Thursday, 4 June 2020, the Office of the Director of Corporate Enforcement (“ODCE”) published a welcome reminder on points to be taken into account when considering liquidators’ reports and the likelihood of restriction proceedings as a consequence of dishonest or irresponsible conduct.
While the ODCE considers each company’s case on its own merits taking into account:
(i) the liquidator’s report on the relevant insolvent entity; and
(ii) any other relevant information obtained independently of the liquidator, broadly speaking:
- The ODCE would not consider directors to have acted dishonestly or irresponsibly in circumstances where the company’s insolvency arose as a consequence of events “largely and genuinely outside of the directors’ control”; and
- In the cases of companies facing insolvent liquidations over the coming months as a result of COVID-19, the ODCE will have “due regard to the impacts of the pandemic” when considering and adjudicating on liquidators’ reports.
The pandemic is a stressful time for most businesses and their directors, especially where judgment calls against the unknown and under threat of restriction or personal liability have to be made. The message from the ODCE is that decisions based on reasonable assessments in the context of the pandemic and made in good faith and honestly are unlikely to yield in restriction proceedings being brought against company directors. In the context of the pandemic, factors that the ODCE will take into account when considering restriction proceedings include:
- The adequacy of procedures for ongoing monitoring of the company’s financial position;
- Whether professional advice relating to financial difficulty was sought;
- The basis for any view held by directors that the company would be able to trade out of difficulty within a reasonable timeframe;
- The length of time that trading continued once apparent (or should have been apparent) that the company was insolvent;
- The extent of the deterioration of the company’s financial position and the accrual of additional liabilities when the directors knew or ought to have known the company was insolvent.
This appears to be consistent with the ODCE’s approach to directors of insolvent entities to date. It is not out to punish legitimate business failure in and of itself in the absence of reckless or dishonest conduct. In terms of conduct, context will be instructive and advice in the face of financial difficulties should be sought early. A link to the ODCE’s publication can be found here.