Corporate governance – Director’s obligations and implications of COVID-19 restrictions
15 May 2020
The restrictions imposed as a result of COVID-19 continue to impact significantly on the conduct of business in Ireland and specifically on how corporate governance is practically maintained and operated. In addition, Directors’ obligations are necessitating constant Board review to address issues arising in relation to any actual or anticipated likely, failure to meet commercial and financial responsibilities. In this article we look at both these issues.
1. Practical implementation of corporate governance
Corporate governance remains as, if not more, critical than ever but is more difficult in the current circumstances of restrictions to implement, in particular as regards Board’s physically meeting to manage their businesses. The restrictions are placing stresses on Directors as to how best to mitigate problems arising for their businesses. Many of the practical issues to be overcome have already been addressed by us in an article dated 19 March entitled Implications for Businesses. By way of update, we would again highlight and elaborate, the critical issues in relation to these as follows:
(i) Board meetings. The Companies Act 2014 (“Act”) and most constitutions allow Board meetings to be held by telephonic and other electronic means (Section 161(6) of the Companies Act. Most companies are availing of this procedure to conduct business at the moment. Some issues to bear in mind while using this facility include:
- Check that the company’s constitution has not disapplied Section 161. Section 161 specifically refers to each director in attendance being able to speak and to be heard by all other attendances. Companies have a responsibility to ensure that there are adequate technological facilities available to all directors to meet this requirement and specifically that there is IT support available to deal with any issues that may arise during a meeting.
- If there is a disconnection for any attendee during the meeting, the meeting should ideally be adjourned until that fault has been corrected. If the meeting proceeds ensure the quorum continues to me met.
- Check if there are any specific requirements to hold the Board meeting in a particular location (e.g. Shareholders’ agreement/tax residency issues) and if so, it is important that these are adhered to.
As identified in our earlier article Director’s decisions may be taken by way of written resolution. However, some important points to note in relation to this are:
- A written resolution must be signed by all Directors whereas a resolution passed at a meeting can be by majority (save as otherwise required by previous agreement or legal requirement).
- The written resolution must be signed by each Director and there may be any number of counterparts. In particular, this requires the hard copy resolution to be signed by each Director and returned to the company chairman or secretary. The resolution is only effective once it has been signed by the last signing Director. Written resolution cannot be used in certain circumstances, notably in respect of a Summary Approval Procedure under the Act.
(ii) AGM’s. These continue to cause businesses some concern. See our earlier article for details in relation to managing AGMs at this time. Given the Government’s requirements in relation to workplace protections and social distancing requirements, and the ongoing enforcement of these as regards the operation of business, it continues to be critical that companies bear these in mind in convening and holding AGM’s. These Government requirements include limiting the meeting and gathering of employees and others (which would include shareholders at general meetings) and encourages the use of video meetings. Therefore, companies should continue to encourage members in the notice convening general meetings to return proxies rather than to attend in person. This applies equally to video meetings where large numbers of shareholders may make it more difficult in practice. Some companies may be able to avail of Section 193 of the Companies Act to avoid the need to hold an AGM; this however is not available to PLCs, guarantee companies or DACs.
(iii) The Companies Registration Office limited access to public. The implications of the CRO’s operating procedures during the COVID-19 restrictions have been detailed in our article and as a result there is more limited service available online or by post. The implications for corporate governance in relation to this include the following:
- Board appointments and resignations: any change to the Board are required to be notified to the CRO by filing a form B10. The normal procedure for these filings is currently delayed but importantly the appointment or resignation is effective from the date of the Board resolution approving it.
- Amendment to a company’s constitution: while required to be notified to the CRO the amendment is effective from the date of the resolution approving the changes to the constitution.
The same is true of a change of registered office. What is not the same however is the situation relating to a change of company name. Notwithstanding that the members may have passed the resolution to change the name, the change of name is only effective once the CRO has issued the new change of name certificate. There are currently delays with the CRO processing any such applications.
- Annual returns: the process for the CRO handling annual returns at the moment is being dealt with as per their latest notification, available in our briefing.
2. Directors’ Obligations and Duties
Given that Directors have obligations of duty of care to the company and to act in the best interests of the company, it is critical Boards act to properly discharge these duties and indeed to protect themselves in so doing. Directors need to be mindful that their obligations in potentially insolvent situations also include acting to protect the interests of the company creditors.
Directors should ensure that they are taking appropriate steps to avoid any claim that they may have acted inappropriately. This is important to ensure that they would not be held liable for the debts of the company or have an insolvency appointment to subsequently have them restricted from acting as Director.
In discharging their duties, Directors should at a minimum, focus on review of the financial position and obligations of the company, stress testing the current financial position of the company which may necessitate, taking appropriate professional advice. It may require more frequent Board meetings than in the ordinary course. Directors should ensure that they are fully considering all relevant issues before making decisions and then adequately recording those decisions.
Further details of the steps directors should take in potentially insolvent situations are set out in our briefing COVID-19 Directors Duties and Solutions for Distressed Business.
As regards the need to engage with lenders if there is any risk of not being in a position to comply fully with financial obligations, see our article Open for Business – Approaching your Lenders on the Path to Recovery.