Guides & Advice

Corporate disputes: Protecting businesses from post-COVID-19 fallout

Published: 28th August 2020
Area: Litigation & Dispute Resolution

Corporate disputes: Protecting businesses from post-COVID-19 fallout

The pandemic may have caused a host of unprecedented circumstances for company directors, but that doesn’t mean they can avoid claims made against them by shareholders.

In fact, failing to respond effectively to the crisis could lead to a rise in disputes raised by disgruntled shareholders.

The importance of decision-making

COVID-19 has forced directors to make quick decisions in order to survive. Whether adapting business models to fit changing consumer habits or following government guidance and making the most of the emergency funding available, these decisions have been hugely challenging.

However, the current state of the economic environment means that high-level decision-making will be scrutinised more than ever. If company shareholders believe more could have been done to protect the finances of the business, then a claim could be filed against the directors.

Staying logical

With very little time to prepare, it’s possible that lockdown led to some business leaders making ill-informed decisions based on panic rather than sense.

For example, if a company took out emergency funding while such finance was at higher rates than usual, then it could have a long-term impact on its financial position. In addition, government-backed business loans may have given some directors the dangerous impression of “free money”, causing them to spend, rather than save.

Unfair prejudice or Derivative claims

Should there be evidence of mismanagement, shareholders can choose to file an “unfair prejudice” claim against their fellow shareholders (who often may be the directors) or a derivative claim against the business’ directors.

The Companies Act 2006 provides that shareholders can use an unfair prejudice claim or a derivative action if they believe decisions were made by the directors (or director/shareholders as appropriate) that weren’t in the interests of fellow shareholders.

Wrongful trading - knowing when to stop

In an attempt to lessen financial pressure, some directors may have continued trading when they shouldn’t have, resulting in wrongful trading.

Under the Insolvency Act 1986, directors have a duty to mitigate the potential loss to the company’s creditors if there is no reasonable prospect of the business escaping insolvency. If a director is reported by shareholders for wrongful trading, then it could result in prosecution.

Protecting against claims

Directors must keep in mind that they are answerable to shareholders in all areas of decision-making, ensuring the correct processes are followed, including:

  • Backing up choices with logical reasoning and good financial grounding
  • Documenting the business measures taken and why
  • Recording financial evidence such as figures for losses and predicted revenues
  • Keeping active and open lines of communication with shareholders
  • Seeking expert legal advice to resolve any disputes at an early stage

Why you need to take action now

By taking a logical approach to decisions, rather than a rushed one, you can put yourself in the best position to avoid any disputes that raise their head post-pandemic.

Contact us

If you would like guidance or advice with avoiding claims made against you by your shareholders, or need help defending a dispute raised by a disgruntled shareholder, then our team of corporate disputes specialists can help – no matter what stage of the process you’re at. Contact Barry Jervis in our commercial disputes team.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

SHMA® ON DEMAND

Listen to our SHMA® ON DEMAND content covering a broad range of topics to help support you and your business.

How can Higher Education Institutions prevent COVID-19 insurance claims?

14 Sep

How can Higher Education Institutions prevent COVID-19 insurance claims?

How can Higher Education Institutions prevent COVID-19 insurance claims? Webinar Register Now About This […]

Intellectual Property: Jurisdiction for IP claims after Brexit

7 Jul

Nicholas Briggs, Partner
Intellectual Property: Jurisdiction for IP claims after Brexit

We will cover: Overview of the Brussels Recast rules, stays under the Recast Regulation, […]

Retirement Housing: Repurposing the High Street

6 Jul

Louise Drew, Partner & Head of Building Communities
Retirement Housing: Repurposing the High Street

In this webinar we discuss the opportunities building close to a town or city […]

Intellectual Property: Patent infringement issues – latest developments

5 Jul

Nicholas Briggs, Partner
Intellectual Property: Patent infringement issues – latest developments

We are a few years on from the Supreme Court’s decision in Actavis. This […]

Our thoughts

All the latest views and insights on current topics.

John Lewis to cut jobs in management restructure

22 Jul

Litigation & Dispute Resolution

John Lewis to cut jobs in management restructure

The John Lewis Partnership announced that it would be cutting up to 1,000 jobs […]

Read article Right Arrow

Directors’ duties and insolvency in a post global pandemic

13 Jul

Corporate

Directors’ duties and insolvency in a post global pandemic

Many businesses are continuing to struggle as a result of the ongoing pandemic and […]

Read article Right Arrow

Ban on evicting commercial tenants extended

17 Jun

Property Disputes

Ban on evicting commercial tenants extended

Read article Right Arrow

Your summer guide to recovery and resilience

15 Jun

Corporate & Commercial

Your summer guide to recovery and resilience

Read article Right Arrow

A double win for CVAs: what do recent High Court rulings mean for landlords?

3 Jun

Property Disputes

A double win for CVAs: what do recent High Court rulings mean for landlords?

Read article Right Arrow

Case law update – landlord and tenant | Section 20 consultations

24 May

Litigation & Dispute Resolution

Case law update – landlord and tenant | Section 20 consultations

Read article Right Arrow

Agricultural partnerships: top three considerations

18 May

Agriculture

Agricultural partnerships: top three considerations

Read article Right Arrow

How can we help?

Our expert lawyers are ready to help you with a wide range of legal services, use the search below or call us on: 0330 024 0333