COVID-19: Key Considerations For Directors articles

At 11:59 pm on Wednesday 25 March 2020, the New Zealand COVID-19-alert level will move to its highest level – level 4.

From then on, New Zealand will go into an unprecedented, military-style lockdown for at least one month.  Mandatory self-isolation will apply.  Educational facilities and all non-essential businesses and services will close.  Only air travel, and public travel, for essential businesses and services will be allowed. 

At this stage the net effect on the New Zealand economy, of COVID-19 and the Government’s attempts (social and economic) to quell the outbreak, remains unclear.

Boards of directors across the country are now more critical than ever to ensuring their companies’ continued survival.  Calm heads, and measured approaches, are what is required. 

In this article, we take a quick look at some of the key considerations for boards in this time of crisis.

Key Considerations for Boards of Directors

1.        Communication

Ongoing, open and honest communication is critical:

• Management:  The board of directors (‘Board’) needs to work closely with, and support, management.  Management will be under significant pressure at this time, and so engagement with management needs to be pragmatic but empathetic.  The Board’s expectations should also be reasonable in the circumstances and clearly communicated.
• General manager/CEO:  The Board should require rolling operational and financial updates from the general manager/CEO.  The situation is evolving quickly, to the point where New Zealand will soon be in lockdown – timely reports will allow the Board to understand what effect COVID-19 is having on the company and what strategic actions need to be taken and when.   
• Employees, financiers, contracting parties:  Boards should be telling management to keep the company’s various stakeholder groups (i.e. employees, financiers, contracting parties) up to date with developments.  External communications need to be transparent and factual.  Internal communications, with employees, need to be sensitive but realistic.   

2.        Government Stimulus Package – Wage Subsidies, Business Finance Guarantee

Boards should be applying for relief under the wage subsidy and Business Finance Guarantee Scheme components of the Government’s COVID-19 economic response package:

Wage subsidies

• Wage subsidies:  Conditional wage subsidies are available for all businesses/employers that are significantly impacted by COVID-19 and are struggling to retain employees as a result.
• Amount:  At the time of writing, the subsidy is $585.80 per week for a full-time employee (20 hrs or more) or $350.00 per week for a part-time employee (less than 20 hrs). The payment is made as a lump sum for a period covering 12 weeks. There is no maximum amount of assistance a business can receive. Applications for the subsidy can be made until approximately mid-June 2020.
• How to apply:  Applications can be made through an online portal on the “Work and Income” website www.workandincome.govt.nz. The Ministry of Social Development will aim to make first payments no later than five working days from when applications are received.

 Business Finance Guarantee Scheme

• At the time of writing, the Government has just announced a $6.25b “Business Finance Guarantee Scheme”.  It will provide short-term credit to solvent small and medium-sized firms affected by the outbreak.  The package will include a six-month principal and interest payment holiday for SME customers whose incomes have been affected.  The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum.  The loans will be for a maximum of three years.  Specific details of the scheme are still being finalised.

3.        Business Continuity and Crisis Management

• Business continuity and crisis management:  The Board and management should be reviewing and actioning the company’s business continuity and crisis management plans, and continually assessing whether the plans are adequate, given the circumstances.  All available third party sources of assistance should be contacted, including government (as mentioned above), shareholders and the wider stakeholder pool.  Also, crisis-response roles for directors and management are critical – the Board should be sharing these with management, now. 
• Areas of investigation/analysis:  Management should be taking steps to manage COVID-19-related risk to the business’ operations, and either the Board (or the company’s audit or risk committee) should be monitoring those steps.  This requires a constant re-assessment and analysis of risk and respective processes and controls.  Key areas to focus on and address include:

• the company’s liquidity and financing needs, immediately and in the long-term; 
• the extent of risk exposure under current financing covenants;
• impact of employee disruption and absence from work, and remote staffing needs; 
• impact on compliance requirements, IT systems and cybersecurity; 
• impact of supply chain disruption on operations and office/plant closures;
• supply chain resilience and the scope of alternative customer and supplier pools; 
• exposure to liability under commercial contracts and review of key terms, including ‘force majeure’, ‘event of default’ and ‘termination’;  and
• emergency succession planning to address general manager/CEO replacement, board continuity and quorum contingencies.

4.        Health and Safety

• Health and Safety at Work Act:  Directors and management have health and safety obligations to staff under the Health and Safety at Work Act 2015.  Directors can be held personally liable if they fail to ensure the company is complying with those obligations.  Compliance is critical.  The Board should seek legal advice on the company’s health and safety obligations, particularly in the context of COVID-19.
• Employee well-being:  Employee well-being, in the context of COVID-19, is paramount.  Once the lockdown ends, the Board needs management to keep it up-to-date with all steps being taken to minimise the risk of transmission and preserve employees’ health and safety.  Also, employees will want to know that their work environment is safe and that they’re being cared for – once the lockdown is over, the Board should require management to let all staff know what protective measures are being taken to ensure their safety.

5.        Forecasts, Financial Position and Structure

• Short-term forecasts:  The Board should ensure management are preparing ‘good-case’/’bad-case’, short-term (i.e. quarterly) business forecasts and an action plan for each forecast.  Performance should be tracked closely against forecasts, so the Board can decide what strategic action is needed.
• Debt and creditors:  Many companies will face liquidity challenges as a result of COVID-19 – declining revenues and cashflows will make it harder to meet debt covenant obligations.  In these circumstances, the focus of directors’ duties quickly shifts to the duty to act in the best interests of creditors (discussed below).  The Board should be engaging with creditors (e.g. financiers, landlords) with a view to obtaining relief from strict repayment obligations.
• Restructuring:  If funding, or funding relief, isn’t readily available, and the threat of insolvency is real, the Board (in conjunction with management and shareholders) should consider whether a restructuring of the business’s capital structure or operations might help stem losses.  Converting business debt to equity, segregating business divisions, selling distressed assets, implementing redundancy programmes, instigating other OPEX-reducing measures, or winding up divisions or subsidiaries, are some possible courses of action which could improve cash flow and/or deliver cost savings.  Placing the company into voluntary administration or liquidation should also be considered.  The Board should ensure financial, tax, legal and restructuring advisors are engaged early to advise. 

6.        Opportunity from Adversity

• Acquisition opportunities:  COVID-19 might create investment opportunities for companies with targeted acquisition strategies and readily accessible funding.   Motivated buyers might take advantage of distressed companies that are offloading assets or divisions.  Financially hampered “Code companies” (i.e. companies that are either listed on the stock exchange or have 50 or more shareholders and at least $30m in assets or $15m in revenue) might become attractive takeover targets under the Takeovers Code.
• Advisors and strategies:  The Board should ensure it has a trusted group of financial and legal advisors and maintains frequent contact with primary shareholders and stakeholders.  It should also be continually assessing strategies (from how to respond to a formal takeover offer to deciding whether to pursue acquisition opportunities). 

7.        Directors’ Duties

Directors need to be mindful of their ongoing statutory duties under the Companies Act 1993.  Breach of these duties can result in personal liability for directors:

• Reckless trading:  With COVID-19, the key duty for directors will be ensuring the company doesn’t carry on in a manner likely to create a substantial risk of loss to the company’s creditors – that is, directors don’t allow the company to trade recklessly.  Directors of companies that have been financially impacted by COVID-19 run the risk of breaching this duty.  Board members should also be mindful of their duty not to allow the company to incur obligations they don’t reasonably believe the company can perform. 
• Active engagement:  It is critical for the Board to remain fully engaged and to maintain oversight of business operations during the COVID-19 crisis.  The Board should naturally be questioning management’s decisions and taking advice from advisors.  This approach should hopefully allow the Board to gauge whether they are properly discharging their statutory duties.

8.        Meetings

• Virtual meetings:  With the Government-imposed lockdown, the Board must consider whether all board and shareholder meetings, for the foreseeable future, can be either delayed or held virtually (or virtually and in person, if required).  The Board should check: (i) that the company’s constitution permits virtual meetings and, if not, recommend an appropriate amendment be made; and (ii) that the company has the technological capabilities available to it to facilitate virtual meetings.
• Electronic signatures:  The Board also needs to be mindful of laws concerning the use of electronic signatures.  The Companies Office, for example, has rejected documents where electronic signatures don’t comply with legal requirements under the Contract and Commercial Law Act 2017 (see https://companies-register.companiesoffice.govt.nz/help-centre/managing-your-online-account/filing-documents-with-electronic-signatures/).  We recommend Boards seek legal advice in this regard.  Specific “e-signing” software may be required. 

9.        Post-Script

• Post-COVID-19 analysis:  Once the dust has settled, and the fallout from COVID-19 is clearer, the Board and management should assess what key lessons have been learned from COVID-19 and whether any change in work policies or approaches adopted during the outbreak (e.g. work-from-home policies) might lead to operational efficiencies in the future.  The Board should also be involved in an appraisal of the way in which the crisis was handled, by the Board and by management.

We recommend you seek specialist legal advice, as soon as possible, in relation to your role as a board member in the context of COVID-19.

The above overview has been provided for general information purposes only.  It is not, nor is it intended to be treated as, legal advice, or an exhaustive list of all COVID-19-related considerations for boards of directors, and is subject to change without notice.