COVID-19: Directors Need To Avoid Getting Caught Flat-Footed

This article serves as a reminder to directors of their common law duties. In particular when a company is nearing or in the zone of insolvency, directors are reminded to be mindful of their actions during this period, specifically to consider that when a company is nearing insolvency, the interest of the company becomes synonymous with the interests of its creditors.

Introduction

In what seems the blink of an eye, the world around us has changed beyond recognition. On 11 March, 2020 the World Health Organisation officially declared COVID-19 a pandemic. The ramifications of COVID-19 are being experienced worldwide. Businesses are facing tough decisions in every industry with respect to how to manage the virus and caught in a difficult conundrum of ensuring that they are making responsible decisions while striving to maintain a level of corporate profitability. While it may take months or possibly years before the full economic effects of COVID-19 are fully realised, directors will have difficult questions to face in terms of the immediate actions that will need to be taken in an effort to secure the future of businesses. In these challenging and unsettling times directors must remain mindful of ensuring they continue to comply with their common law fiduciary and statutory duties and in particular, considerations that may impact a business as a result of COVID-19. Directors must ensure that they are not caught flat-footed and take proactive steps to protect companies and more importantly its creditors.

Directors' duties in the context of COVID-19

A director plays a critical role in the affairs of a company. A director's action or inaction will impact a company's fortunes and those of its shareholders, employees and creditors. Cayman Islands law is largely derived from English common law principles and statutesand the Cayman Islands' courts regard English authorities as persuasive. Unlike England, in the Cayman Islands, the general duties of directors are not codified. In addition to the general duties derived from the common law, certain duties are to be found in Cayman Islands statutes, principally the Companies Law. Directors' duties may also be confined by the company's constitutional documents, namely its articles of association.

At common law, a director owes two types of duties to the company; fiduciary (which are unlimited) and duties of skill, care and diligence. As businesses begin to feel the impact of COVID-19 it is important that...