As share prices slump and company failures loom, Toby Sharpe, a lawyer specialising in corporate governance, tells Mark Jennings that directors need to be highly aware of their responsibilities.

* Watch Mark Jennings’ full interview with Toby Sharpe in the video player below*

Not since the GFC, have company directors faced such a serious challenge as the one confronting them now. Even companies that have been historically strong are suddenly struggling and becoming potential business failures.

Directors must decide what to do immediately but also have regard to any long-term implications from their decisions.

Companies cannot trade if they are insolvent. If they do, the directors are personally liable.

The Australian government, worried that boards will be under pressure to quickly put their companies under administration, has given directors a six month respite from their duty to prevent insolvent trading.

The New Zealand government has yet to follow suit and Bell Gully partner Toby Sharpe says company directors here are in a tough position.

Newsroom asked him if some companies are likely to be trading insolvently.

“Almost inevitably, the difficult thing is not what you should do when you are trading insolvent, that is relatively clear. The difficult thing is knowing whether or not you are trading insolvent. Businesses that were trading very well last year are going to have a completely different year this year. And it is really hard for people today to try and work out what that looks like.

“Last year, they will have had a range of projections for their financial performance. This year the range will be huge, they won’t know ‘is my revenue going to be down this much or that much? How does that affect my expenses?’ This really goes to the core of the director’s duties of trading while you’re insolvent. They need to ask these tough questions and come up with a clear picture of what all this means, and that will be evolving week to week.”

Sharpe says directors of publicly listed companies are under extra pressure from the continuous disclosure rules.

“A fundamental part of being listed on the stock exchange is that people are buying and selling your shares every day so that comes with an obligation to disclose material information immediately. Now this is a very difficult rule to apply in these periods of significant uncertainty. The starting point when assessing that obligation is ‘what does the market know about my business, what do they expect my revenue to be, my profits to be, what have I told them? Have I given them some earnings guidance in the last year and is it reasonable to expect that they still that to be my earnings guidance? Secondly what do I now think.’

‘If there is a difference in what the market now expects and what you (directors) actually expect it is usually the point where there is a disclosure obligation and even if that disclosure is ‘I had given you a relatively clear picture about what my earnings were going to be but now I actually don’t know and I can’t tell you a revised number’ that is what you need to say.”

Bell Gully is a foundation supporter of Newsroom.

Mark Jennings is co-editor of Newsroom.

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