Company directors are critical to the management of companies and this becomes even more pronounced when companies are facing financial difficulties, as is the case currently with the pandemic eruption.
The powers endowed upon directors to manage the affairs of the company inevitably bring obligations and responsibilities upon them. The European Commission (EC) has recently issued a binding Directive, which must be transposed into local law, whose aim is to encourage viable businesses to restructure at an early stage in order to avoid insolvency.
As per the Directive, the key to success for preventive corporate rescue is directors’ pro-activeness and timing. Thus, where an enterprise is experiencing financial difficulties, directors have a duty to take immediate steps to minimise losses and to avoid insolvency. Examples of these steps, as per the Directive, are as follows:
- seek professional advice
- use early warning tools
- protect business assets and avoid loss of key assets
- examine the company’s viability and reduce expenditure
- hold negotiations with creditors
- seek to enter into preventive restructuring procedures.
This European Directive comes on the back of an increasing international trend to shift directors’ duties from being shareholder-oriented to being more creditor-oriented in the situation where their company is in the vicinity of insolvency.
The message for company directors is simple and clear. They have to size up to their legal duties and obligations. They have to take full responsibility and accountability for the well-being of the companies they are running by:
1. being on top of the company’s business and financial affairs,
2. having reliable monitoring and reporting mechanisms (including up to date audited financial statements and internal management information),
3. instituting and sustaining an open-ended communication and dialogue with lenders and other key stakeholders,
4. obtaining reliable expert advice to restore and preserve company health and value.
Resilient Boards of Directors lead to resilient businesses which lead to resilience in dealing with crisis and uncertainty.
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