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

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.

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