As COVID-19 continues to cause widespread economic disruption, the UK government has announced lending measures to support struggling businesses. This alert summarises:
This alert is relevant to directors of disrupted, stressed, and distressed companies who are considering additional borrowing.
As part of a wider package of business support, the government plans to introduce:
The government will publish further information concerning both of these lending schemes before they come into force week commencing 23 March 2020.
Directors may be interested in committing their struggling companies to further borrowings under these programs to make up for a sudden lack of liquidity. However, this decision cannot be a purely commercial one – to avoid personal liability, directors should also weigh up certain legal considerations, including the risk of breaching their duties and engaging in wrongful trading.
Breach of directors’ duties
Directors should be aware that:
To incur further debt, directors should consider whether new borrowing will genuinely lead to the best result for the company’s stakeholders (and if insolvency is likely, in particular for its creditors). If a director does not have an honest belief that the further lending will be sufficient to avoid insolvency or generally be for the benefit of the company’s stakeholders, they will be in breach of their duties when their company takes on the debt. This applies equally to a director who abstains from the decision-making process, or who voices concerns but allows the funding to proceed.
Directors may also be held liable in insolvency proceedings for wrongful trading, which is where a director:
As such, where a company is distressed, a hasty decision by a director to take on further debt without duly considering their company’s solvency position and the protection of their creditors will exacerbate the risk of being found guilty of wrongful trading. Particular care is required in the current situation where liquidity positions can change rapidly and dramatically.
We note that the government is currently considering a proposal to suspend operation of these laws. However, there is no definite policy yet, and so while we are of the view that the courts would be minded to give a broader latitude to a director’s discretion in deciding to utilise the government’s funding programmes, all the usual factors that inform a director’s decision to borrow should still be considered.
There are a number of practical steps directors can take in order to demonstrate compliance with the above. As a starting point, we recommend:
COVID-19 poses an unprecedented threat to businesses, and many companies are already facing disruption and liquidity shortages. While governmental and other lending programs may be enticing, directors should exercise caution so as to avoid personal liability.