Preparing for the unknown: Directors' duties and the end of the Brexit transition period

Preparing for the unknown: Directors' duties and the end of the Brexit transition period

Brexit update - where are we now?

Directors could be forgiven for being confused as to what action they should be taking to prepare for life after 31 December 2020. The government released an “Urgent message from the Business Secretary” on 18 November 2020, entitled “Are you ready for new rules for business with the EU?” Yet, while Brexit negotiations continue, directors are scrambling to get their businesses ready without any clarity on exactly what they are preparing for. While talks between London and Brussels over a trade agreement are ongoing, it remains unclear whether the UK will depart on the terms of a negotiated deal, or if it will be trading with the EU from the beginning of 2021 on World Trade Organisation terms. 

Directors are subject to statutory duties, and, in particular, the duty to exercise reasonable care, skill and diligence. What does this mean in the context of business planning for the end of the Brexit transition period? Exercising the section 174 duty involves both an objective and a subjective element. A director must exercise the skill and diligence of a reasonably competent person carrying out his or her particular function, and also (the subjective element) must deploy the general knowledge, skill and experience that the particular director has (which may lead to a higher standard being imposed). For example, an executive director with a background in HR or employment law may be expected to report to the board on changing employment rules. Directors should have already undertaken a degree of preparation, which will vary depending on the nature of their business and the extent to which they trade with the EU, and should be aware of the key areas of risk for their business. In addition, it might be appropriate to delegate investigation of certain areas of the company’s business to appropriately qualified directors, who should then report back to the board. Such areas may include:

  • Online services – much of the commentary around a free trade deal focuses on the manufacturing sector, but what about services? If the business involves the provision of online services across the EEA, how will this be affected by the eCommerce Directive no longer being applicable? The eCommerce Directive currently allows EEA online service providers to operate in any EEA country while only following relevant rules in the country in which they are established. This principle will no longer apply to the UK from 1 January 2021. UK businesses will have to ensure they are compliant with the rules in each EEA country in which they operate. See the government’s briefing here.
  • Data protection - for busineses which receive and transfer personal data to or from organisations abroad, from 1 January 2021 the business may need to have Standard Contractual Clauses in place with EU counterparts in order to legally receive personal data from the EU. See the government’s briefing here.
  • Employees – free movement for European nationals is due to end at 11pm on 31 December 2020. This will have a significant impact on virtually all employers, since many employ European nationals to a greater or lesser degree. In many cases, UK employers will have to sponsor European nationals, and if your business does not already have a sponsor licence, we recommend that you consider applying for one as soon as possible. The new rules will also likely impact recruitment budgets, since it costs thousands of pounds to sponsor an individual for five years. But the cost of ignoring the new rules could be much higher: civil penalties of up to £20,000 for employers who do not carry out the correct right to work checks where it is later discovered that the person is working in the UK illegally. See the government’s briefing here. Our immigration team has a detailed briefing on the end of free movement, linked to another article about sponsorship and the post Brexit immigration scene. 

Directors may be liable to the company if they breach their duties, but in general the law is sympathetic to directors who take their duties seriously and perform them responsibly. More information is available in our practical guide to directors’ duties

We have a dedicated Brexit working group to assist UK businesses in their preparations for this challenging period. If you would like to discuss how we can help your business, please get in touch with your usual Stevens & Bolton contact or one of our Brexit experts. If you require immigration advice, please contact Kerry Garcia, head of our immigration department.

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