Company directors should be braced for decisions they made in the heat of the Covid-19 pandemic to be brought into question, according to a litigation lawyer.
John Bett, head of dispute resolution and litigation at Lindsays, believes these challenges could trigger a rise in the number of corporate legal disputes.
He warned that directors of businesses of all sizes need to be more aware of their legal responsibilities in case they run into issues, whether financially, about the actions they have taken – or both.
The pace of the pandemic – particularly in its early phases – left many directors making business critical decisions with little or no time to consult or fully consider the implications.
These include taking emergency loans later deemed as unnecessary, that the high interest rates of any borrowing may not have been appreciated or monies paid to directors in anticipation of a future dividend that did not materialise.
In cases that reach court, Bett said the circumstances in which those decisions were made would be taken into account, although the court could equally hold the director to account where they find that an inappropriate decision was just that and not a result of Covid-19.
“Directors may therefore not be able to hide behind the pandemic and the panic that may have influenced their decision.”
Government statistics show there were 44 company insolvencies in Scotland during October. While that was down 47% compared to October 2019, it is feared that numbers will rise in 2021 amid the continuing consequences of pandemic and the easing of restrictions around creditor-led winding up petitions.
Lindsays’ lawyers expect that with a greater number of insolvencies, the number of instances of potential claims being brought against directors because of their actions will also increase.
Although the suspension of wrongful trading rules – which had been in place between April and September to reflect the unprecedented trading environment – came back into force on 26 November and will remain until April, Bett warned that risk of action against directors still exists.
“This is not a licence to operate carte blanche,” he said. “Directors still have fiduciary duties to meet and, if found in breach of those, could still find themselves personally liable, with the associated impact on their own personal finances.”