Practically Speaking - The impact of Covid-19 on economic substance compliance and directors duties

Transactional Partner Rachel Graham and Director of Client Services Amy Roost, host the first episode of our new podcast series: Practically Speaking. This series was launched to provide our listeners with practical advice and insights on issues applicable to stakeholders of BVI entities. We hope that the series will be of interest to directors, shareholders, trustees, corporate service providers, and others concerned with BVI entities.

Episode one: The impact of Covid-19 on economic substance compliance and directors duties

In this first episode, Rachel Graham and Amy Roost discuss two topics: the implications of COVID-19 on economic substance compliance and reporting, and matters directors should be considering if they find their company is moving towards financial difficulties.

Key takeaways

• Travel restrictions due to COVID-19 and how directors of BVI entities can comply with their economic substance obligations
• Directors duties in turbulent times

Many BVI entities have already classified themselves for economic substance purposes, and many have put in place arrangements to comply with their economic substance obligations. However, the COVID-19 travel restrictions in place around the world may make some of these arrangements difficult or impossible to fulfil.

The BVI ITA released some guidance on 27 March 2020 (found here), outlining that they do expect the economic substance requirements to be met so far as possible and indicating some methods companies can employ to ensure decision making relating to core income-generating activities is, so far as possible, carried out in accordance with a company’s economic substance obligations.

The BVI ITA has reminded entities that they may hold virtual meetings or appoint alternate directors. In the event that directors are not able to meet the economic substance requirements with respect to decision-making on core income-generating activities, they should record the steps the company is taking in order to try and comply with their obligations and the reasons for any non-compliance.

In times of worldwide economic disruption, it is not uncommon for companies to face financial difficulty and in these circumstances, directors should be mindful of their statutory and fiduciary duties and should be making sure that they understand the financial position of their company and monitor it closely. They should ensure that all the key directors and officers of the company have access to sufficient financial information so that they may ascertain the financial position of the company with reasonable accuracy and be in a position to make informed decisions about the future of the company (read more about directors’ duties during turbulent times here).

Additionally, directors should be looking closely at the relationships with their bankers, insurance providers, and other external creditors and take legal advice at an early stage. It may be prudent to consider restructuring or reorganising the company and steps should be taken to understand the options available.

When dealing with group structures, directors of a subsidiary shouldn’t assume the availability of parent or group company support. Unfortunately, a worldwide pandemic that is affecting entities all over the world may make this assumption untenable.

Directors are advised to consider and action those steps which allow them to make prudent and reasonable decisions in the circumstances and to keep supporting documents relating to those decisions. Directors should be mindful of the fact that when a company becomes insolvent or is at risk of insolvency, their duties shift from being owed to the company and its shareholders to being owed to creditors.

Stay tuned for more episodes of Practically Speaking. If you have any questions please contact your usual Harneys contact or email Rachel and Amy.

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Harneys produces a variety of podcasts, providing on-the-go legal analysis over the airways. Visit our Podcasts page to see them all.