What steps should directors take to manage their risk of personal liability when making decisions during times of economic uncertainty?

The ongoing conflict in the Middle East is continuing to drive volatility in energy prices and contribute to a climate of economic uncertainty. Much like previous crises (Covid-19, the Truss mini-budget, tariffs, not to mention the surge in gas prices triggered by the war in Ukraine), the present energy situation is anticipated to usher in a challenging macroeconomic environment and further strain global supply chains. This is likely to result in higher inflation and the probable and (ill-advised) reactionary increase in interest rates, coupled with slower growth both at home and abroad.

None of these are positive for business, and the uncertainty makes it difficult for business leaders to plan effectively. So, what should directors of English companies do?

Whilst directors – during a period of financial fragility or uncertain trading conditions – face the same considerations as during trading in the ordinary course, their focus should be even more acute in circumstances where the risk of insolvency is heightened and consequently also the potential for personal liability.

Key actions for directors:

• Financial hygiene remains at the heart of decision making. Directors must remain live to the financial position of the business, ensuring they assess the ‘balance sheet’ position (are the assets of the business worth more than its liabilities (including contingent and prospective liabilities)?) as well as testing ‘cash flow’ (can the company pay its debts as they fall due?).
• Directors also need to consider the continued availability of funding, the terms on which it is available (and its cost) as well as the certainty with which it has been offered.
• Directors must meet regularly and with due haste, where driven by solvency concerns, a critical event or changing circumstances.
• Directors should continually assess the impact of the energy crisis: initial views on impact should be frequently revisited, responsibility for monitoring energy risk allocated and business plans and forecasts stress tested.
• Where there is any concern that the company is trading in the ‘twilight zone’, the directors must seek prompt, specialist advice. They must weigh that advice and, using their own independent judgement, decide what steps to take and whether the company should continue to trade.
• Directors must balance optimism in deciding to trade on, with a realistic assessment of the worst-case scenario. Where the company is, or may be insolvent, or on the brink of insolvency, directors may be required to consider the interests of the company’s creditors (in addition to or rather than the interests of the shareholders).
• Where the business operates across a group of companies, directors must remember that solvency is assessed on a standalone company basis, and not group-wide. That consideration also flows through to the duties owed by directors; as they are owed to each company, the potential for conflict is magnified where the interests of group companies may start to diverge.
• Record keeping must remain accurate and timely, with up-to-date management accounts and cash-flow forecasts prepared, and full minutes taken at each board meeting.

Review your counterparty risk

Directors should also monitor the position of corporate entities in their supply chain – something we considered last year in Navigating counterparty distress: a practical guide – but which is of increased focus given the cross-border nature of supply chains and the international nature of the challenges presented.