Directors’ duties in time of COVID-19

Posted on: Tuesday, April 07, 2020

Introduction

On 11 March 2020 COVID-19 was declared a pandemic by the World Health Organisation, two days following the first confirmed COVID-19 case in Cyprus. Between then and 13 March 2020 – when the first protective measures were announced by the Cypriot government – little could foretell the avalanche of decisions, measures, countermeasures and statements that would follow in an effort to balance salvaging lives with salvaging livelihoods.

Directors are not doctors or nurses and will not be called to decide who lives and who dies from a life expectancy position – which is what doctors and nurses may be called to do if hospitals exceed capacity. However, directors run state hospitals, private clinics, companies and businesses that will be affected by the government’s decisions regarding COVID-19 and will be called on to decide the life or death of the businesses that they run. As such, they may have to consider:

  • letting staff go;
  • reducing salaries;
  • reducing employee benefits;
  • ceasing operations;
  • closing down businesses or business sectors;
  • defaulting on loan repayments;
  • and defaulting on rental payments.

    • This article examines directors’ duties in the face of a crisis from a corporate law perspective.

    Directors’ duties

    Directors’ duties remain the same during a crisis such as the COVID-19 pandemic – namely, they retain the burden of acting with due care and skill in the best interests of the company, as enshrined in case law. However, there are competing interests to consider, the priority of which will determine directors’ strategy in steering a company through a crisis. Competing interests include:

  • shareholders’ interests;
  • creditors’ interests;
  • employees’ interests; and
  • directors’ interest in protecting themselves from personal liability.

    • What should be directors’ primary considerations?

    Trading companies – especially those required by government decisions to cease operations – will
    primarily be concerned with their:

  • solvency;
  • ability to repay loans;
  • ability to pay salaries; and
  • ability to meet other contractual obligations.

    • Directors’ primary consideration should be to have access to information – first about external factors that may affect the company and second about internal factors that may affect the company’s response to the external factors.

    At the risk of oversimplifying directors’ exercise of care and skill as provided by the Companies Law (Cap 113) and case law, the following are practical steps that could assist directors in exercising their

    duties:

  • Be informed of the latest government decisions.
  • Be informed of decisions that affect employees’ rights and ability to come to work.
  • Take professional advice if in doubt of how government decisions may affect a company’s business continuity.
  • Encourage regular meetings with the board – the law provides the possibility of video
    conferencing.
  • Keep minutes of meetings and, subject to the law, ensure that directors’ actions during a crisis are either permitted by the shareholders or that the shareholders are informed of key decisions.
  • Refer to the company’s latest financial position and encourage real-time updating of ledgers and cash flow.
  • Keep in mind that companies are separate entities, so avoid blending assets or liabilities of different companies within the same group.
  • Take professional advice if the solvency of the company is in doubt.
  • Take professional advice on the management of contractual obligations in light of those that cannot be met for reasons beyond the directors’ control.

    • In formulating a strategy during a crisis and beyond, directors should keep in mind their fundamental duty to act in the best interests of the company and its shareholders as a whole. The Companies Law (Cap 113) does not provide a codified list of directors’ duties – these are enshrined in decided case law. This by itself renders it even more necessary to seek professional advice when decisions involving the future of a business and its stakeholders are reached. The risk of personal liability is perhaps the best motive for keeping a legal and an accounting adviser close by. The fact is that unprecedented times such as the present can quickly turn a thriving business into an insolvent one.

    In reaching and applying their decisions during a crisis, directors should:

  • consider the short and long-term consequences of any decision;
  • promote fairness among the company’s shareholders;
  • foster relationships, taking into account that better judgement may be impaired (as panic is the worst adviser and will overwhelm the stakeholders, including suppliers, customers and employees); and
  • consider employees’ interests – they stand to lose and have grounds to worry about their
    positions, which will ultimately affect the company’s performance.

    • In uncertain times, directors must continue discharging their fiduciary duties with care and skill. The law makes no distinction, and stakeholders’ interests allow little if any room for error. Directors are not alone; they should utilise the expertise of their advisers, document the reasoning of their decisions and act in good faith in light of all of the considerations.

    For further information on this topic please contact Stella Koukounis at Solsidus Law by telephone (+357 22 007700) or email (s.koukounis@solsiduslaw.com). The Solsidus Law website can be accessed at www.solsiduslaw.com.


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