CHAPTER 03 Navigating Financial Distress: Key Considerations for Directors
Conduct in the Boardroom: What Directors Need to Know DUE DILIGENCE REQUIREMENTS IN A FINANCIAL CRISIS Canada’s corporate law sets out several foundational duties for directors, including the requirement for directors to safeguard the corporation’s interests while supervising its management and affairs. 24 Directors’ actions do not need to be perfect, only reasonable in light of the circumstances and what they knew or should have known at the time. 25 In a business environment that is experiencing daily changes, directors will likely not be judged with the benefit of future knowledge regarding the pandemic or the economy, but rather on what they knew when the decisions were made. The easiest way to refute an accusation that a director did not properly oversee the corporation during these uncertain times is to show that he or she acted with due diligence. In a crisis or rapidly developing situation, additional efforts may be required to ensure that directors are properly discharging their fiduciary duties. Some questions that may have been routine may become more urgent. Directors may want explicit – for example, written – assurances from management that legally required remittances to the government, including employee withholding taxes and corporate taxes, are up-to-date and kept in segregated accounts. Expert advice may be required, particularly about supply chain and exchange rate issues, or about the consequences of defaulting on key contracts. Consideration should be given to limitation periods for enforcing or preserving rights through tolling or standstill agreements. Caution must also be taken to avoid acting overly aggressive as a creditor of other financially distressed companies. Dividend and share buyback policies, where they exist, should be reviewed and, if possible, amended to reflect the issuer’s new financial reality. All of these actions or positions will likely be scrutinized by lenders, creditors and other third parties.
In a business environment that is experiencing daily changes, directors will likely not be judged with the benefit of future knowledge regarding the virus or the economy, but rather on what they knew when the decisions were made. However, in a crisis or rapidly developing situation, additional efforts may be required to ensure that directors are properly discharging their duties.
35
Davies | dwpv.com
Powered by FlippingBook