La version française de cette communication est publiée ici.
The COVID-19 pandemic raises unique challenges not only for companies generally, but for their directors and officers personally. Corporate insolvency may be a looming and unexpected threat in the face of restricted operations and the liquidity crunch resulting from significant revenue declines (including from sales declines and challenges collecting receivables) and increased costs (such as those driven by transitioning to a remote work force, keeping employees safe and workplaces operational, and downsizing).
The pressure on directors and officers is two-fold: a) increased emphasis on the discharge of their fiduciary duties and the prospect of heightened scrutiny—including with hindsight at a future date—of present decision-making; and b) potential personal liability of directors and officers for certain obligations of the company. Directors and officers of non-profit organizations should be aware that similar considerations and risks apply to them.
We explore key considerations for directors and officers as they navigate companies through the choppy waters brought on by the crisis.
Insolvency is of particular concern for directors and officers because: a) there may be heightened risk of personal liability in such circumstances, including by reason of additional duties or obligations arising under applicable insolvency legislation; b) some protections customarily available to directors and officers—such as indemnification from the company—may be of little or no comfort where the company is insolvent; and c) the ensuing financial losses that may be suffered by creditors and shareholders of the company, together with the public court process that accompanies formal insolvency proceedings, typically results in the conduct and activities of directors and officers in the lead-up to and during insolvency receiving much greater scrutiny, often with the benefit of hindsight.
Where insolvency occurs, certain claims may be made against the directors and officers personally (which claims vary by jurisdiction), including:
In addition, directors and officers may be personally liable if the company conducts business while insolvent. Accordingly, directors and officers ought to ensure that the company carries on business only if it can meet its liabilities as they become due and there is a reasonable expectation of newly incurred obligations being satisfied. That may be particularly challenging in the midst of the COVID-19 pandemic, given the high degree of uncertainty that exists.
Directors and officers of insolvent companies also face heightened risk under their corporate duties of loyalty and of care. Although they do not owe a fiduciary duty to creditors, they must consider the interests of creditors as well as the interests of shareholders and other stakeholders. However, in these circumstances, the interests of these different constituencies may conflict; therefore, directors and officers face the difficulty of balancing competing interests without definitive criteria to guide their decision making.
In addition, directors and officers of public companies are likely to face difficult decisions regarding the timely disclosure of material information in the context of a potential insolvency and the impacts of the COVID-19 pandemic on the company.
Directors and officers of companies experiencing financial difficulty should take heightened measures to protect themselves, including seeking timely legal advice. Typically, actions that would involve changes to the company’s financial course of conduct should be taken well before the financial difficulties of the company become acute, because changes made while the corporation is insolvent, or on the eve of insolvency, may later be reviewed and even reversed. That timeline may be highly accelerated in the midst of the COVID-19 pandemic. In addition to taking necessary steps to demonstrate due care and diligence in all their decision making, directors may wish to take special steps that include the following:
In appropriate cases, directors and officers should consider retaining independent legal counsel to advise them on how to protect against personal liability in the circumstances.
In many instances, there are “safe harbours” for directors and officers, including due diligence defences and deference to informed business judgments. Attending to the foregoing considerations and obtaining timely legal advice will assist directors and officers in obtaining the benefit of these “safe harbours” and otherwise mitigating the risks to which they are subject.
Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.
To discuss these issues, please contact the author(s).
This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.
For permission to republish this or any other publication, contact Janelle Weed.
© 2023 by Torys LLP.
All rights reserved.