Unprecedented Times: Practical Considerations for Directors Duties in the face of COVID-19

The COVID-19 pandemic is an unprecedented global health crisis which has undoubtedly caused significant disruption to the growth, function and stability of the global economy. As a result, many corporations have experienced and will continue to experience a significant reduction in their commercial activity in the near term.

This reduction in commercial activity is, in many instances, owing in large part to the promulgation of emergency ‘stay in place’ orders across many jurisdictions, the effect of which is to restrict the free movement of people and the opening of non-essential businesses to the general public in an effort to minimize the spread of COVID-19.

On 17 March 2020, the Governor-General of The Bahamas issued a Proclamation of Emergency and subsequently, Parliament enacted the Emergency Powers (COVID 19) Regulations, 2020. The Prime Minister has since issued numerous emergency executive Orders to, inter alia, impose a 24 hour curfew, restrict the movement of people into and within The Bahamas and the operation of non-essential businesses, and to enforce strict social distancing protocols.

In turn, many businesses have experienced sharply decreased sales and, ultimately, a significant decrease in their cash-flow and operating revenue. This ‘perfect storm’ has, by and large, paralysed many sectors of the Bahamian economy and has no doubt come as an unexpected challenge to many companies and their directors. Moreover, the effects of the COVID-19 pandemic threaten global economic stability and, increasingly, many companies find themselves in financial difficulty and, unsurprisingly, at risk of insolvency.

Under Bahamian corporate law, company directors owe statutory and fiduciary duties to act honestly and in good faith with a view to the best interests of the company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. As a matter of general principle, these duties are owed to the company and the company alone. However, exceptionally, where the solvency of the company is questionable, these duties are extended and directors must have primary regard to the interests of the company’s creditors, as a whole, and must act honestly and in good faith, with a view to minimising any loss to those creditors.

In practical terms, directors should not permit or cause the company to enter into transactions with a view to preferring one creditor (or class of creditors) of the company over other creditors (or class of creditors) or with a view to avoiding an obligation that may be owed to a creditor. Further, where the directors know or ought to know that there is no reasonable prospect that the company will avoid insolvency, the directors must take every reasonable step to minimise the creditors’ loss. A director’s breach of these duties may result in personal liability for misfeasance, effecting a fraudulent disposition and/or in the latter case, wrongful trading.

In several jurisdictions, including the United Kingdom, Singapore and Australia, government and regulatory policies have been revised and, in some cases, legislative measures have been implemented to provide temporary ‘safe harbour’ relief to company directors, who otherwise may be exposed to liability for wrongful trading in light of the current COVID-19 crisis. For instance, in the UK the government has retrospectively suspended the offence of wrongful trading from 1 March 2020 and has announced proposals to suspend certain insolvency procedures to facilitate the rescue and recovery of insolvent companies.

To date, however, no such measures have been adopted in The Bahamas to temporarily suspend or relax the corporate duties owed by directors.

In the circumstances, it is important that directors of Bahamian companies are aware of the statutory duties which they owe to the company, as outlined above, in the event that the company experiences financial and other difficulties that may potentially lead to an insolvency scenario.

A list of practical recommendations to assist directors in the exercise of their duties during these challenging and uncertain times is set forth below.

1. Understand the regulatory environment – directors should review and understand the various Government Proclamations and Emergency Orders and their impact on the company’s business. Where the company provides essential services and is permitted to remain open, directors should seek advice regarding the obligations of the company to its employees from a health and safety perspective. Where the company is required to close its doors, directors should seek advice if temporary layoffs and / or redundancies are contemplated.
2. Review and understand the company’s contractual and debt obligations – directors should review existing contracts to establish the company’s rights and obligations and whether it may suspend or avoid contractual obligations if this is desired. Additionally, a review of the company’s lending agreements should be reviewed to ascertain whether there is a risk that the company may breach its financial covenants. Where appropriate, forbearance or loan restructure arrangements should be pursued.
3. Communicate and/or meet more often – directors should communicate regularly with management to obtain up-to-date information on the operations of the company and closely monitor and manage the company’s financial position. In the event the company is in financial difficulties, the full board should convene often to assess the company’s financial health and consider appropriate measures that may be taken. When communicating by email on matters which may be sensitive, directors should bear in mind that such communications will be discoverable in the event of litigation.
4. Keep proper records – directors should be sure to meticulously record meetings of the board and all decisions taken by directors, and the reasons for those decisions, All decisions should take into account current data, including cash flow projections and trading forecasts and where appropriate, legal and financial advice.

Higgs & Johnson has a robust team of attorneys working with clients across the globe to consider and address issues arising as a result of COVID-19.

Authors
Tara Cooper Burnside – Partner in the Insolvency and Corporate Restructuring and Litigation practice groups
Rhyan Elliott. – Associate in the Insolvency and Corporate Restructuring and Litigation practice groups

The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases. Copyright ©2020 Higgs & Johnson. All rights reserved.