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Companies in distress: considerations for directors if heading towards insolvency

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Generally speaking directors owe a fiduciary and statutory duty to their company only. S228 of the Companies Act 2014 puts these duties on statutory footing and every director should be aware of the duties they owe and what is expected of them.

However, if a company is heading towards insolvency, the directors have a greater obligation to their creditors. This duty extends to anyone who would might be entitled to payment under the liquidation process eg. Employee’s etc.

A company becomes insolvent when they can no longer pay their debts as they fall due. Continuing to trade while insolvent can be exceptionally risky for a director as he/she may be found personally liable if the court are deemed to have acted recklessly. S610(3) of the CA2014 states;

“A person is deemed to have traded recklessly if he was party to the contracting of a debt by the company and did not honestly believe, on reasonable grounds, that the company would be able to pay the debt when it fell due for payment as well as all its other debts”

Recklessly trading can result in a prosecution from the ODCE and eventually the restriction or disqualification of a director alongside the possibility of being found personally liable for some of the debts of the company.

Please see below some considerations a director should have at the forefront of their mind during any difficult period.

Seek professional advice

Initially, one might think that avoiding any extra expenses when a company is struggling is the right course. However, aside from the obvious commercial benefits of receiving informed professional advice, seeking advice may alleviate any personal liability that may be put on a director. If a director can show that they sought professional advice in a timely matter, for the good of the company and its creditors, this may absolve them from any claims of reckless trading.

Be Aware

This goes without saying but being aware of both your duties to the company and to any creditors can help a director avoid any pitfalls that may later result in personal sanction.

Being aware of the financial state of the company at any given moment is essential. Knowing when debts fall due, and subsequently identifying at which point the company may be insolvent is essential. Remember, the law does not excuse a director for not knowing that the company was trading recklessly. Rather a court will judge a director’s actions from the perspective of what he ought to have known. Therefore, it falls on the director to be fully informed.

It is important to not only be aware of the creditors of the company but also the debtors. Knowing the circumstances which surround a debtor can help you to prepare for situations down the road.  For instance, if you are aware a major debtor is falling on hard times, you might be able to predict a situation in which you do not receive your payment in a timely manner. This may reduce any knock-on effect for your creditors.

Engage with both your creditors and debtors so that you can identify and potentially nullify any difficulties in the future. Having an open line of communication can be invaluable to the survival of a business.

Document board meetings

Keeping records of any board meetings can help establish that decisions were made on a basis of good faith and reasonable thinking. Holding statutory meetings can assist a director in establishing their bona fide intentions should their actions be questioned in a liquidation process.

Review Contracts

Being aware of the contents of any contracts you are a party to. With the emergence of Covid-19, force majeure provisions may offer you or a debtor some respite from fulfilling the terms of a contract. A director should be aware of any of these provisions and their potential effects.

Insurance policies should also be reviewed to see if any business interruption cover clauses apply which may benefit or negatively effect their business.

Personal guarantees are not affected by any the liquidation process and will still be valid if a liquidator or examiner is appointed. Therefore, a director should be acutely aware of any personal guarantee he or anyone else has entered into in relation to the company.

Make sure you are availing of any assistance schemes

Availing of any available government help schemes and utilising these tools can be invaluable to a business which is struggling. Various articles on the reliefs available and any COVID19 changes which may be of note can be found on our website. (https://www.lavellepartners.ie/news/)

Don’t give preference to certain creditors

All transactions within 6 months of an insolvency event are reviewable. If it is deemed by the liquidator that a director or company has treated one creditor with preferential treatment over another the director can seek to unwind that transaction for the benefit of all the creditors. This time period extends to two years if the transaction involved a connected person or entity. This falls in line with a director’s duty to creditors to preserve any assets for a liquidation when insolvent.

About the author: Dermot McClean, Solicitor on the Insolvency Team