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Company directors may face claims due to Covid-19 decisions

14th December 2020

John Bett, Head of Dispute Resolution and Litigation at Lindsays, warns that company directors could find decisions they made in the midst of the Covid-19 pandemic are brought into question 

Directors of businesses of all sizes need to be more aware of their legal responsibilities in case they run into issues, whether financially, about the actions they have taken - or both. 

John also warns that the suspension of wrongful trading rules - recently reinstated until April - does not mean people can avoid being held to account for irresponsible actions. 

He says: “The speed and unpredictable nature of Covid-19 caught us all off guard, meaning that we have had to be reactive for most of the year. 

“However, as events move on, it is likely that companies - and specifically their directors - will be called to account in relation to their response to Covid-19, leading to a rise in corporate disputes.” 

The pace of the pandemic - particularly in its early phases - left many directors making business critical decisions with little or no time to consult or fully consider the implications. These include taking emergency loans later deemed as unnecessary, that the high interest rates of any borrowing may not have been appreciated or monies paid to directors in anticipation of a future dividend that did not materialise.

In cases that reach court, John says the circumstances in which those decisions were made would be taken into account. 

But he added: “The court could equally hold the director to account where they find that an inappropriate decision was just that and not a result of Covid-19. 

“Directors may therefore not be able to hide behind the pandemic and the panic that may have influenced their decision.” 

Government statistics show there were 44 company insolvencies in Scotland during October. While that was down 47% compared to October 2019, it is feared that numbers will rise in 2021 amid the continuing consequences of pandemic and the easing of restrictions around creditor-led winding up petitions.

A greater number of insolvencies is likely to result in the number of instances of potential claims being brought against directors because of their actions also increasing. 

Directors generally are advised to have a heightened awareness just now of the finances of their company - and seek professional advice about any concerns they have - to avoid putting themselves in a position where they find themselves personally liable for any adverse financial consequences of the decision made. They are also advised to keep clear records of the business decisions they make and the rationale for them. 

Although the suspension of wrongful trading rules which had been in place between April and September to reflect the unprecedented trading environment came back into force on November 26 and will remain until April, the risk of action against directors still exists. 

“This is not a licence to operate carte blanche,” he said. “Directors still have fiduciary duties to meet and, if found in breach of those, could still find themselves personally liable, with the associated impact on their own personal finances.”  

Directors should also ensure they consider the latest UK and Scottish Government advice relating to Covid-19 and take any steps they consider necessary for their company. 

John Bett, Partner and Head of Dispute Resolution and Litigation at Lindsays

johnbett@lindsays.co.uk

0141 302 8409