Any prudent director and officer must consider how the crisis is affecting the business they are responsible for. It is an extraordinary and unusual situation, and, as the Prime Minister has said, “we are all entering into unknown territory”. As a corporate director and officer, it is important to act decisively and to be able to handle this unexpected new situation.
All chief executives must be able to handle a multitude of problems such as reduced sales, sickness among key employees, lack of or defective raw materials, manufacturing errors, technical breakdowns, IT problems, complaints, loss on debtors, etc., and if they fail to exercise due care inflicting loss on creditors and others, they may be personally liable.
Business Judgment rule
It takes a lot to be held personally liable in Denmark as we recognise the so-called “business judgment rule” or, in other words, we accept that the director/officer may make misjudgments that may result in a loss for both the company, its owners and business partners. It is a prerequisite for being covered by the “business judgment rule” that the director/officer has acted in the interest of the company, and that the director/officer has made well-considered decisions on an informed basis.
This also applies in the present situation where all directors are catapulted into a crisis with completely new challenges - or rather; the known challenges now suddenly all arise at once and with an unusual force as the outside world is shutting down, and employees are to be sent home.
Consequently, directors' and officers' liability is also to be viewed in the light of the unexpected problems, and there will be a greater leeway for making wrong decisions resulting in a loss without the director being held personally liable.
Actions for damages after the crisis
This said, there is hardly any doubt that we will see actions for damages in the wake of the corona crisis. Everybody will suffer a loss, and if the loss is not reasonable and understandable in the specific situation, some will look for a person to assign the blame.
Therefore, it is also important for directors and officers to know what they can do to ensure that they are not met with claims for directors' and officers' liability after having made the very significant efforts they are now making to save businesses and jobs.
As most directors are taking well-considered actions on an informed basis, it is, from a legal perspective, often the documentation that may be insufficient and cause problems in a subsequent legal action for damages.
When numerous and far-reaching decisions are made rapidly within a very short time, there is a risk of failing to ensure proper documentation of the considerations behind the decisions made. We all know how the world can look very different in hindsight, and we also know how memory is affected and shifts as time passes and you find yourself in a different reality.
Therefore, the importance of documentation cannot be emphasised enough.
In the present situation, many businesses will probably need to organise themselves a little differently and perhaps change the director/officer, involve more key employees in the daily decisions, hold more frequent board meetings and communicate to the employees to meet the challenges now facing the company.
In this connection, it is very important that a person is appointed to prepare minutes and document the decisions made.
This may sound onerous, but it is important to emphasise that it is not the form but the content that counts, and the minutes do not have to be extensive. Brief negotiation or resolution minutes sent by e-mail to the participants stating the basis of the decision: which information was available, which information was taken into account and why, and which alternatives were considered.
This is all very valuable information to present in a potential subsequent action for liability against directors to provide the necessary evidence that the directors acted within the limits of the “business judgment rule”.
The risk of being personally liable exists only if the director/officer has acted outside the scope of the “business judgment rule” when making decisions which have resulted in a foreseeable loss.
In the situation where businesses are under pressure and face liquidity problems, there is no doubt that the director’s/officer's room for manoeuvre decreases as the risk of loss increases.
A classic example is that the director may be held liable if the company continues to purchase goods on credit knowing that there is a significant risk that the company is unable to pay for the goods on the due date.
Another example is the unequal treatment of creditors as failure to comply with the rules of the Bankruptcy Act on the pari passu ranking of creditors’ claims within the individual creditor classes may lead to the personal liability of the distressed company’s directors.
Consequently, a very significant part of Horten’s insolvency advice to businesses experiencing pressure on liquidity relates to how to avoid personal liability and losses for the creditors at the same time as ensuring the basis of the continued operations of the business.
Various tools are available in this connection, including the possibility of initiating negotiations with the main creditors with the objective of reaching a moratorium or another payment scheme with all creditors. This is possible by filing for in-court restructuring. The moratorium or payment scheme will be adopted if a majority of the creditors accept, and the moratorium or scheme will then also apply to the other creditors (the minority), who are forced to accept it.
Directors' and officers' most important rules to remember
There are two prevailing concepts to remember for the director/officer of companies with liquidity challenges:
First of all, the company’s operations may not continue beyond the so-called point of hopelessness - the time when there are in fact no prospects of a solution.
A rule of thumb is that if a bank has accepted to continue providing liquidity, or if a company is in dialogue with the bank concerning a solution to the liquidity problems, the director/officer will be exempt from liability and may continue operations.
It may in the circumstances actually be considered negligent to suspend operations if it is still possible to find a solution to the company's liquidity situation.
Secondly, it is important that all creditors are treated equally, and that individual creditors are not given preference, unless they have a special preferential status. Salaried employees (not the executive officer) have such preferential status, and it is therefore typically not negligent to pay salary and withholding tax (A-tax).
Tax and VAT claims generally have the same status as creditors with unsecured claims. However, the government currently supports measures concerning extension of payment of tax and VAT to provide liquidity to companies so that they can continue operations. We assume that this also entails that the government accepts, in this quite extraordinary situation, that the principle of equal treatment is derogated from temporarily.
The company’s bank will normally hold security by way of a charge on the assets of the business, and the directors will normally be in a close dialogue with the bank concerning the development. However, if the bank introduces stricter terms, demands additional security, demands a reduction of or closes the credit, it will, of course, give rise to considerations as to whether it is financially sound to continue operations.
In the time to come, Danish businesses will have to be in a close dialogue with their customers, banks, creditors and other business partners. This will hopefully solve the problems for many businesses and bring them through this crisis relatively unscathed. However, problems will most certainly arise that will require advice on how to navigate to avoid liability.