Company direction and insolvency in a time of virus

Company Directors have much to consider at the moment, given the immediate impact of COVID-19 and its longer-term consequences.

The effects will be felt in all types of companies, from such as Glencore plc which has deferred a decision on its proposed $2.6bn dividend, to Rockayne (Jersey) Limited t/a Channel Islands Lines, which has concluded that it has no alternative but to cease operations with immediate effect, to locally-administered structures and asset-holding vehicles, as well as to local trading companies and regulated financial services businesses.

We focus here on certain of the obligations of directors when deciding whether to continue to allow their businesses to operate, or whether to cease trading.

Directors will likely have in mind the following:

• Make an initial assessment of the issues facing their business. We focus here on solvency-related issues, and specifically in the Jersey context- businesses in other jurisdictions may have other legal and regulatory matters to consider.
• Gather information relevant to the analysis of those issues. Financial information will be key, as will be information from Government about financial support, if eligible (https://bit.ly/JGov420) from the private lending sector, and, if relevant, from the financial services regulator (https://bit.ly/JFSC420).
• Ensure that they have the right team in place, with appropriate skills to deal with the issues, whether as fellow board members or as technical advisers.
• Discuss the issues regularly. These discussions must give rise to an action plan, which will evolve with the circumstances. To protect the directors from any future criticism, it will be important to document the discussion in board minutes, and to agree those minutes immediately, as an accurate record of how the board responded at any given point.
• Communicate with stakeholders. These may include shareholders, employees, trade unions, creditors, regulators, insurers and customers.

Returning to solvency-related issues, directors will be concerned to ensure that they are discharging their legal obligations, and not incurring personal liabilities by their actions or failure to act. We set out below some of the key provisions relating to insolvency.

Statutory duty: The basic, statutory duty of directors under Jersey law is to “act honestly and in good faith with a view to the best interests of the company… and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (Article 74, Companies, (Jersey) Law 1991 (the “Companies Law”)).

Unsurprisingly, this does not mean that each director has personally to possess all relevant elements of expertise- that would be unrealistic. A director can discharge their duty by exercising independent judgment having first assessed the views of their fellow board members and technical advisers.

Fiduciary duty- avoid conflicts: Overlaying this is the fiduciary duty of loyalty, which includes the obligation on directors to avoid conflicts of interest, or to manage them appropriately. This can often arise in the context of a joint venture vehicle or companies with connected ownership.

Duty to creditors: But focusing on the best interests of the shareholders as a body will not always be enough. When the directors know or should know that the company is or is likely to become insolvent, English case law is clear that, at that point, a duty to consider the interests of the creditors arises, and that this should essentially dictate their conduct. This has been reflected in Jersey case law relating to insolvent trusts (In re the Z II Trust 2015 (2) JLR 108). Jersey directors should regard themselves as similarly accountable.

Wrongful trading: There is an additional, specific statutory provision which can make directors personally liable for a company’s debts when they continue to trade in circumstances where they should have taken steps instead to prevent the company’s creditors’ position from becoming even worse.

When a company is in the course of Creditors’ (i.e. insolvent) Winding Up or a Désastre, the Jersey Court has the power to order that a past or current director/s be personally responsible for the debts and liabilities of the company after the relevant time.

The key test for initiating each procedure is one of insolvency – which both statutes define as the inability of a debtor to pay their debts as they fall due. This is a simple cashflow test.

The relevant time is any point before the start of the procedure when the director knew that there was no reasonable prospect that the company would avoid a Creditors’ Winding Up or Désastre, or on the facts known to them was reckless as to whether the company would avoid the procedure.

However, even if those conditions are fulfilled, the Jersey Court will not make an order rendering a director liable for the company’s debts if it is satisfied that after the relevant time they took reasonable steps with a view to minimising the potential loss to the company’s creditors.

There is no statutory definition of what might amount to “reasonable steps”. However, directors of companies whose finances are not robust will probably need to consider the following:

It does not follow that entering into an insolvency process will necessarily be in the creditors’ best interests. They may be better placed if the company continues to operate (although if you continue to trade you will need to adhere to the relevant legal and regulatory requirements of the jurisdictions in which you operate). But engaging with creditors, being mindful of the best interests of the body of creditors, and documenting the steps taken at each stage will be critical in any future assessment of the directors’ conduct.

Preferences: As regards creditors, directors should also be wary not to prefer the interests of certain creditors over others. Both in the context of a Creditors’ Winding Up or a Désastre, the Jersey Court has the power to make a restorative order against others, including directors and former directors, in favour of the company if they do anything or allow anything to be done at a relevant time that has the effect of putting the person into a position which, in the insolvency process, will be better than the position they would have been in if that thing had not been done.

The relevant time is the 12 month period immediately before the start of the insolvency process and in circumstances where the company was insolvent at the time the preference was given or became insolvent as a result. Directors can take some comfort from the fact that the Jersey Court will not make restorative orders unless satisfied that the company was influenced when giving the preference by a desire to put the creditor into a better position in the event of an insolvency process. However, the Court’s statutory powers allow it to draw significant inferences in circumstances where the recipient of the preference is connected to the company or its directors.

Finally, Jersey’s Government is currently considering what further steps it can take to help to preserve jobs and Jersey’s economic infrastructure, possibly to reflect the UK Government’s announcement to suspend temporarily wrongful trading provisions, and the UK Courts’ deferral of company winding up petitions for the period. However, it is difficult to imagine that any provisions introduced in Jersey will allow directors of companies with impunity to act against the interests of their creditors- for example, it is difficult to imagine any watering down of the basic statutory duties or the threat of disqualification and (if relevant) regulatory action. The prudent course, therefore, in terms of the steps to be taken, and engaging with creditors and other stakeholders is unlikely to change.

The above should not be regarded as legal advice. Advice specific to the circumstances should always be sought. If you are concerned about the difficult decisions facing you at the moment, please don’t hesitate to contact David Wilson (https://www.oben.je/people/david-wilson/) or your usual Oben contact (https://www.oben.je/people/).

7 April 2020