Safe harbour for company directors

The Government has introduced a temporary ‘safe harbour’ from personal liability for directors of companies facing insolvency owing to COVID-19.

The COVID-19 Response (Further Management Measures) Bill has amended more than 40 pieces of legislation to enable businesses, local government and others to more effectively manage the impacts of the response to COVID-19. 

The changes make it less likely that directors will be held personally liable if they allow their companies to trade while insolvent – so long as they do not act dishonestly or in bad faith.

The ‘safe harbour’ — which has been backdated to April 3, when the support measures were first announced — aims to ease the pressure on directors, who may otherwise feel that they need  to wind up their business, perhaps prematurely, owing to the current climate.

The terms of the ‘safe harbour’ are as follows.

Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the coming 6 months will not result in a breach of duties if:

  1. in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of the COVID-19 pandemic on them or their creditors
  2. the company was able to pay its debts as they fell due on 31 December 2019
  3. the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).

Directors must be aware, however, that these temporary safeguards do not release them from their other obligations and duties under the Companies Act 1993. These include acting in the best interests of the company, and their duty of good faith. 

Directors can still be held accountable for a serious breach of these duties, and for dishonestly incurring debts.

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