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20 June 2023 Directors' duties in times of crisis – what to keep in mind

Global political crises, volatile interests, inflation and supply chain issues challenge many companies. In this blog series, VISCHER's restructuring & insolvency team will show how companies can navigate through these challenges. Here you will find answers to the most important questions regarding the duties of a director in times of crisis.

1. Do duties of the board of directors change during a crisis?

No, but the board of directors must show leadership.

Under Swiss law, the board of directors can delegate the management of the company. However, certain non-transferable and inalienable duties always remain with the board of directors, in particular, the strategic and financial overall management of the company. The board of directors performs its duties in a standard leadership cycle by planning the strategy and giving management the necessary directives, by monitoring and controlling the management and, if necessary, intervening and adjusting the organisation and strategy. Under normal circumstances, meetings held at regular intervals (for instance, four times per year) are sufficient to properly perform these duties.

In view of this and the upcoming challenges, the board of directors must radically adapt its leadership cycle. They must get information more frequently and board meetings must be held on an impromptu basis and be followed up by meetings at shorter intervals. All members of the board of directors must be available at short notice. The board's chairperson should initiate this acceleration of the leadership cycle. However, if the chairperson fails to act, each member of the board of directors is well advised to be proactive and request the chairperson to provide all available information and to promptly convene a meeting.

2. On which issues should a company's board of directors focus?

The company's liquidity should be the primary focus.

In the corona crisis, most companies are suffering a slump in turnover while costs remain. In view of the massive cash drain, many companies will be on the verge of insolvency within a short time unless countermeasures are taken. Thus, the board of directors must regularly review the management's liquidity planning and evaluate and deliberate whether the measures taken to control the cash drain are appropriate.

The board of directors should carefully examine all possible measures and ensure that those selected are promptly implemented. If the management seems overstrained or is not up to the task, the board must take action itself, for instance, by having the chairperson or another board member assume an active role in the management.

Crisis-related liquidity problems must be combated by appropriate measures such as agreements with existing creditors and the procurement of emergency loans. Balance sheet problems and over-indebtedness follow only downstream

3. What needs to be considered regarding over-indebtness and restructuring measures?

In the event of an imminent over-indebtedness, the board of directors must act immediately.

If the company threatens to become insolvent despite the measures taken, an application for a moratorium must be filed if necessary. If there is a threat of over-indebtedness, the board must have an audited interim financial statement prepared. If this shows that the company is in fact over-indebted, the board of directors must file for bankruptcy or take restructuring measures.

If insolvency or over-indebtedness is imminent, the board of directors must act nimbly and vigorously. Various options have to be examined in a short period of time, negotiations have to be conducted with a multitude of parties and the solution selected has to be implemented quickly. This will be a tremendously challenging and stressful time for the board of directors. In order to mitigate this, depending on the financial situation of the company, it is advisable to evaluate possible scenarios and restructuring measures as part of a contingency plan well in advance.

4. Is it advisable to resign from the board of directors in view of a crisis?

Preferably not.

In the vast majority of directors' and officers' liability cases, it was not bad decision-making, but the failure to act that triggered the board members' liability. Thus, a board member should not resign, but become active, gather information, act and lead. In any event, board members would remain liable for acts or omissions prior to their resignation from the board. Further, a resignation in times of crisis, when each board member is needed, would be highly disloyal to the fellow board members.

5. What are the possible consequences of a breach of directors' duties?

The members of the board of directors could become liable for damages in the event of a breach of their duties.

The board members and all persons involved in the company's management are liable for any loss or damage arising from any intentional or negligent breach of their duties. Breaches of certain directors' duties could even result in criminal prosecution.

In particular, the board of directors may be held liable if it fails to make decisions, shows a lack of commitment or in case of conflicts of interest. Even if a decision of the board subsequently proves to be wrong, if such decision has been taken as part of a proper decision-making process, based on adequate information and such decision seemed reasonable at the time, a Swiss court will not hold the board liable for breach of directors' duties.

6. Recommendation

In wake of a crisis, a Swiss company's board of directors will have to take a series of delicate decisions. In doing so, the board of directors is well advised to adopt an active approach.

If you have any questions on this topic, your trusted contacts at VISCHER and the VISCHER Restructuring and Insolvency team will be happy to assist.

Other articles in the series:

Authors: Benedict F. Christ, Dorothea Wirth, Alexander Rom, Flavio Langenegger