Covid-19 – How a director can stay out of trouble in turbulent times – Ten Commandments of Corporate Governance

Covid-19 – How a director can stay out of trouble in turbulent times – Ten Commandments of Corporate Governance

This note is part of a series that the lawyers of Reddy Charlton will issue on the major legal, personal and business issues that will confront us all during the Covid-19 crisis.

In these turbulent times, effective corporate governance is essential. It improves transparency, accountability and viability.

Directors must not only act responsibly and reasonably but also be in a position to demonstrate that they have done so. Those who do not may be exposed to personal liability and criminal sanctions in addition to the adverse impact on the business and reputation of the company.

Directors who follow these guidelines will go a long way to minimising that exposure. Where a person is a director of more than one company in a group, the commandments should be observed in relation to each company of which he/she is a director.

The first five commandments are of relevance to all companies. The last five are of particular relevance to any company having solvency issues.

At the heart of good corporate governance should be the following 10 commandments:-

GENERAL PRINCIPLES

1. Have frequent board meetings and maintain board minutes

Board Meetings

Insist on frequent meetings of the board of directors. Each is an opportunity for the directors to meet, consider and manage the business of the company.

A physical meeting is in current circumstances impractical, however, there are alternatives:-

  • Frequently, the business of a directors meeting can be held by conference call, subject of course to the constitution of the relevant company and provided a quorum is present.
  • Usually the constitution of the company will allow that Board approval be given to a specific matter through a unanimous written resolution. The resolution is approved (through signature) by all the directors (although not physically on the same document). It is effective as and from the date and time the last director provided his or her approval.

Board minutes

Board meetings essentially provide a formal forum where the management and business of the company is carefully and attentively discussed. Accordingly, the minutes of the meeting should reflect that care and attention and specific resolutions for remedial action.

If such action results in changes to the authority and / or responsibilities of senior management, these should be clearly set out and when those changes are to come into effect. In each case the reasons for the changes should be noted.

The minutes should document the manner in which the directors have fulfilled their duties. This includes the fiduciary duty to act honestly and in the best interests of the company. Directors must refrain from benefitting from any conflict of interest. Their duties must be discharged with the skill and care necessary for the pursuance of the best interests of the Company.

If you are not happy as a director with a decision that has been taken, you should ensure that your position is recorded.

Minutes are generally recorded by the company secretary and entered into appropriate minute books.

It is a category 4 offence to fail to maintain appropriate board minutes and a director may l be liable on summary conviction to a class A fine (a fine not exceeding €5,000).

2. Risk Management

Risk management is essential for every company no matter the size. The process involves identifying potential risks and limiting the potential exposure of your business. However, depending on your specified industry the degree of risk can vary. Accordingly, directors should ensure:-

  • That the risks to third parties and the external risks to the company are kept under regular review.
  • The risk of failure to comply with applicable laws and regulations is one of the risks that should be included in this assessment.
  • If the risk is anticipated it should be dealt with swiftly in order to minimise any damage to the company.

3. Keep Proper Accounts

A company is required to maintain “adequate accounting records” which requires that such records are sufficient to:-

  • Record and explain the transaction of the company;
  • Enable the financial position of the company be ascertained;
  • Enable the directors to ensure that any financial statements or directors reports can be prepared;
  • Enable the financial statements prepared to be audited.

Accordingly, all books and accounts should be kept up to date. If not, steps to rectify should be taken, with outside help if necessary.

4. Budget and management accounts

Ensure that the directors receive updated budgets and appropriate management accounts on a regular basis.

5. Maintain statutory books and ensure CRO returns are made on time

Statutory books must be kept at the company’s registered office within in the State and available for inspection for the members of the company.

Books include:-

  • Register of members
  • Register of directors and secretaries
  • Register of allotments and transfers
  • Register of beneficial interest
  • Register of director’s interest in contracts made by the company

WHEN INSOLVENCY IS ON THE HORIZON

6. Review viability

Ensure that the viability of the company is reviewed by the directors and that a plan is adopted to deal with all situations as they arise.

A clear time-line for the review of the progress of the company should be agreed and observed.

Directors should have regard to updated budgets, projections and management accounts to keep informed of the current financial and trading position of the company.

7. Remedial measures

Ensure that the company takes appropriate external, professional advice on a rescue plan and on whether or not the company should cease trading.

8. Communicate with your creditors

Ensure that major creditors are communicated with on a regular basis and obtain their support for the continuation of the company.

9. Insolvency options

Make sure that as directors consider all options for the company:-

  • Schemes of Arrangement
  • Examinership
  • Liquidation
  • Receivership

For a complete overview on your corporate insolvency options, please see our articles under the insolvency section on our website.

10. If nobody listens, go

If your views are repeatedly rejected and the company continues to decline, resign as a director and send a letter to the company secretary setting out your reasons for doing so.

CONCLUSION

It is inevitable that many businesses will come under severe distress in the next few weeks and months. Large parts of the economy have shut down. The uncertainty as to when and how business activities will resume adds enormously to the pressures on directors.

It would be bad enough to loose a business, but it would be a tragedy to get into a position of being restricted or disqualified or to end up with personal liability.

The discipline imposed on directors not only to act responsibly and reasonably, but also be in a position to demonstrate that they have done so will assist them in navigating through the extraordinary challenges we all face.

For further information contact Elaine McGrath emcgrath@reddycharlton.ie



Elaine McGrath
Author: Elaine McGrath