Legal Insights

COVID-19 : Protection for directors and their businesses during times of uncertainty

By Geoff Musgrove, Julia Tonkin

• 29 April 2020 • 5 min read

The COVID-19 crisis is putting significant strain on us all, especially small and family run businesses which are having to adapt to new ways of operating.

Many businesses are finding there are 2 particular concerns:

  1. how to make decisions and enter into contracts when people are working remotely and travel bans make meetings difficult; and
  2. how to ensure that key executives, and their assets, are appropriately protected against potential claims from litigants or creditors, if their businesses are struggling financially.

There a number of ways that these issues can be dealt with and some of these are set out below.

Powers of attorney for a company

Signing documents and making decisions can be logistically challenging when directors and officers cannot be in the same location or are indisposed.

A power of attorney granted by a company can empower a person that is appointed as attorney to sign documents and make decisions on behalf of a company. This can be limited to specific or limited matters or can authorise an attorney to act on behalf of a company unrestricted. Therefore, careful consideration needs to be given as to who is an appropriate person to be appointed and what powers they are to be given and in what circumstances.

A company power of attorney provides for continuity of business as one person can enter into contracts, including deeds, on behalf of the company. This is particularly useful when directors are working remotely but also, going forward, for when directors are away on business trips, on leave or, in the case of a small business with a sole director, where the director is unavailable due to incapacitation.

It is important to note that a company power of attorney is different from a personal power of attorney. A director is unable to delegate his or her responsibility as a director by power of attorney.

The position of a director is personal to the director. However, it is possible for a director to appoint under the constitution of a company an alternate director for periods of absence of the director.

Using technology in company meetings

The COVID-19 situation makes it challenging to convene meetings, including the company’s annual general meeting, if the company is required to hold a general meeting.

Often a company constitution will include provisions which specifically allow for meetings to be held by telephone or electronically. As a first step, you should review your constitution to see what options are available to you.

Regardless of your company’s constitution, section 249S of the Corporations Act 2001 (Cth) (Corporations Act) provides that a company may hold a meeting of its members at two or more venues using any technology that gives its members, as a whole, a reasonable opportunity to participate. Practically, this section still requires that a physical meeting be held. However, the majority of members can attend the meeting via telephone or web conference so long as they are given a reasonable opportunity to participate.

The quorum and proxy requirements set out in the Corporations Act and in the company’s constitution will still apply to a meeting held electronically or by teleconference.

If the company does not have a constitution the quorum and proxy requirements will be set out in the replaceable rules under the Corporations Act.

Asset protection for directors

Protecting important personal and family assets against claims from litigants or creditors should always be front of mind for directors. However, this is especially important where there is potential for the business to suffer cash flow issues or for major projects or contracts to become difficult to fulfil.

Although you cannot avoid financial responsibility for wrongdoing, asset protection measures for business owners or directors should be considered for key assets such as the family home. Some ways to protect your assets may include establishing a family trust, ensuring that assets are held by domestic partners in a way which limits exposure or moving certain assets into a self-managed superannuation fund.

Some ways to protect your assets include;

  • establishing a family trust, arranging for assets to be held by partners in a way which limits exposure;
  • reviewing your Will to ensure that assets of the estate are protected through testamentary trusts; and
  • reviewing your superannuation binding death benefit nomination for you and your partner to ensure that superannuation benefits are protected if the director passes away.

Insurance

To prepare your business for times of financial stress, it is important to ensure you have the correct insurance policies in place to protect the business and also to minimise the risks surrounding personal liability of directors.

Australian company directors have a strict duty to prevent insolvent trading. If a director breaches this duty, he or she can be personally liable for debts incurred by the company.

Despite strengthened ‘safe harbour’ provisions to provide further protection for directors in light of the COVID-19 crisis, directors are not protected from some of the broader obligations to prepare a company for unprecedented events.

To minimise personal liability, directors should review their directors’ and officers’ insurance policies.

Generally, insurance providers will cover a breach of directors’ duties within the standard policy. However, it is important to ensure your insurance policy is tailored to your company’s needs.

Time to review

While the COVID-19 pandemic throws into sharp relief the benefit of the types of measures described above being in place, this may be an opportunity for you and your business to take steps now to minimise risks and uncertainty in the future.

Maddocks has produced guides to a range of legal issues raised by COVID-19. You can access these guides here.

Looking for more information on operating in the COVID-19 climate?

Get in touch with the Charities & Not-for-profit team.

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