COVID-19 Board Business Series Update: Directors’ duties and the ODCE’s guidance on restriction orders
We have issued a number of recent publications which have sought to provide comfort and practical guidance around directors' duties in the current uncertain environment. In our note Board Business: Directors’ duties, practical mitigation steps and assessment of financing arrangements, we explored the position of directors of companies with solvency issues and the steps that should be taken by a board to best mitigate solvency risks. Our suggestions included the types of mitigants the board can employ to limit personal exposure and reduce the risk of a restriction order being obtained against the directors, in the event the company becomes insolvent.
As an addendum to our other notes, there is a recent development in the area of restriction orders, which should offer comfort to boards. On 4 June 2020, the Office of the Director of Corporate Enforcement (ODCE) issued guidance, (the Guidance), around the risk of having a declaration of restriction made against directors in circumstances where the company’s insolvency is as a consequence of the COVID-19 pandemic.
There is a positive legal obligation on the liquidator of an insolvent company to bring an application for the restriction of directors of a company that is wound up on an insolvent basis, unless specifically directed by the ODCE not to bring such application. The ODCE may relieve a liquidator of their obligation to bring a restriction application where it is satisfied that:
- the director acted honestly and responsibly in relation to the affairs of the company
- he/she cooperated with the liquidator in winding up the company, and
- there is no other reason to restrict him/her
The Guidance does not change the law in the area, nor does it suspend the reckless trading regime in any way (as has happened in a number of other jurisdictions e.g. the UK, and Australia), but the move by the ODCE to issue the Guidance is to be welcomed. The Guidance gives an insight into the perspective from which the ODCE will consider director behaviour during this period of uncertainty, and may be an indication as to how the law will be applied in relation to an insolvency related to Covid-19. Each case will be looked at by the ODCE on its facts and the overall steps taken by the directors, however the Guidance should offer comfort to those directors making genuine efforts to rescue businesses from financial difficulty. The key takeaway from the Guidance is that, provided that directors’ decisions and judgements are:
- made on the basis of objectively verifiable evidence
- based on assessments and assumptions that were reasonable in the context of the circumstances pertaining at the relevant times; and
- made in good faith and the directors otherwise acted honestly and responsibly, it is unlikely that the ODCE will consider that the company's directors should be restricted
In addition, the fact that the ODCE relieves a liquidator of the obligation to bring restriction proceedings can be helpful for directors in the context of other proceedings seeking to impose personal liability on directors for the debts of the company.
In any event, it is very unlikely that directors who follow our practical suggestions, set out in Board Business: Directors’ duties, practical mitigation steps and assessment of financing arrangements, would face restriction or disqualification proceedings where they behave honestly and responsibly.
If you have any questions in relation to the matters raised, or if there are any other issues relating to the impact of COVID-19 which you would like to see dealt with in future editions, please contact any member of Corporate and M&A team.
Date published: 8 July 2020