Director duties (and the conflicts that can arise) in uncertain financial times

Under the normal course of business directors will be focussed on delivering stakeholder value, whilst always being aware of their fundamental duty to act in the best interests of the company – promoting its success for the benefit of its members as a whole. 

Should a director change the way he or she operates and prioritises his or her duties at times of crisis? The COVID-19 pandemic is having a huge impact on businesses across every sector; many directors who are feeling the financial impact might not be sure what to do next. 

What challenges are Directors facing right now?

Balance sheet and more likely cashflow insolvency are amongst the greatest real threats facing UK companies at this current time.  

If a company’s financial situation takes a turn for the worse, directors need to be taking every possible step to minimise the potential loss to the company’s creditors as this becomes the overriding duty.  

In challenging financial circumstances, many directors may find themselves with conflicting pressures. Highlighted below are some conflicts which could arise, that directors may not have needed to consider with such necessity before:

• Staff – As business becomes more challenging it is only natural that staff may be impacted financially. The Furlough scheme has already been accessed by many UK businesses, but directors will find themselves in conflict when it comes to whether or not they top up staff wages (which are only being supported up to 80%). It may be in the best interests of the workforce to top these salaries up, but other liquidity and cashflow matters need to be considered as a priority, such as creditor positions.

• Shareholder directors of SMEs – there is an obvious blurring of boundaries in many SMEs (where the shareholder is often a director) which brings additional quandaries in times of crisis. As shareholder one would initially look at their own financial position and look to get their invested funds out of a company, but as a director this may not be in the best interests of creditors.

• Professional directors – for those providing professional director services it is only natural to feel the desire to do what the client (the shareholder) wants (and pays for) but again this needs to be balanced with duties to creditors. 

• Managing debtor arrangements – again it would only be natural to lean on those that owe the company money. Unfortunately they will often be experiencing the same financial challenges, so deferrals, and at times discounts, may be called for.

So what should Directors be doing right now?

The more engaged, prepared and proactive directors are now will mean a better outcome in the short, medium and long term. Practically, this would most likely mean:

• Urgently reviewing supply chains, cashflow and other financial MI.
• Frequent reviews and consideration of operational forecasting - stress testing business continuity plans.
• Minimising expenditure.
• Prioritising payments to business-critical creditors, while trying to treat all creditors equally.
• Ensuring all key decisions and decision-making processes are documented.
• Maintaining an open and transparent relationship with creditors and suppliers as appropriate.
• Remembering that it will often be in the interests of creditors to continue trading.
• Maintaining an open channel of communication with debtors.
• If there is any doubt at board level, directors should seek professional help from lawyers, accountants and or insolvency practitioners.

Stay the course

There is a right and there is a wrong way to manage a company and this does not change at times of economic difficulty. Regardless of any conflicts, a director’s duty in financially difficult times where insolvency is likely must, first and foremost, be to his or her company’s creditors. To ignore this could lose the board control of the business, but may also land the directors with financial and criminal charges.