Since the beginning of the COVID-19 crisis, concerns have been raised by directors and bodies representing directors regarding potential liabilities directors may face by allowing businesses to continue to trade where there is a risk of insolvency.
In particular many directors are becoming increasingly concerned of the risks of personal liability being imposed on them if they allow their insolvent business to continue to trade in the anticipation that it will trade itself out of difficulty when the current COVID-19 crisis is behind us.
A recent statement by the Office of the Director of Corporate Enforcement (ODCE) will assist directors in the application of Irish insolvency law concerning restriction proceedings in the context of the COVID-19 pandemic.
If a business is already insolvent, the directors owe a duty not to worsen the position for the creditors of the business. Even where a company is insolvent, directors may decide to continue to trade provided that this decision does not cause further loss to creditors and that they reasonably believe that the company can recover financially. Directors need to bear in mind that there are a number of actions that can be taken against directors that cause an insolvent company to continue to trade which include:
Reckless Trading. To make a finding of reckless trading against a director (which makes the director personally liable for the debts of the company) the Court must determine that they knew or ought to have known their actions or those of the company would cause loss to creditors. In a case where reckless trading is alleged, a finding that an officer acted “honestly and responsibly” in relation to the conduct of the affairs of a company may relieve the officer of personal liability. The Courts have set the reckless trading hurdle reasonably high and the Irish judiciary has some appreciation for entrepreneurial risk.
Fraudulent Trading. Directors may be made personally liable for the liabilities of an insolvent company where they knowingly carried on trading with intent to defraud creditors.
Restriction. - The ODCE will direct that restriction proceedings be issued against a director unless it is satisfied that the director acted honestly and responsibly in relation to the affairs of the company.
Where there is a clear risk of insolvency, the directors owe a duty to the company’s creditors not to conduct business in such a way as to prejudice their interests. To manage this, and to ensure the directors are properly fulfilling their duties where they continue trading while in the zone of insolvency, the board should ensure that, the following occurs:
As highlighted above, many directors are becoming increasingly concerned of the risks of personal liability being imposed on them if they cause their insolvent business to continue to trade with the anticipation that it will trade itself out of difficulty once the current COVID-19 crisis lifts. The ODCE has in the last number of days issued a very helpful statement in relation to its view on restriction proceedings against directors (copy attached to this article). In summary it provides that:
This statement will provide some comfort to directors of insolvent companies in the current COVID-19 crisis.
There have also been many calls by directors for the Government to adopt a similar approach to that recently introduced by governments in the UK and Australia to temporarily suspend corporate insolvency laws such as reckless trading. Such a suspension would provide a further level of comfort to directors of companies that are otherwise viable (but in financial difficulty due to COVID-19). It remains to be seen whether the Irish Government will take steps to suspend or amend the current legislation regarding reckless trading or restriction proceedings. However, even if no amendments are made to the current legislation, provided the company was solvent at the start of the pandemic and the directors acted responsibly (for example by adopting the measures listed earlier in this article), in my view it would be unlikely that a court would make a finding of reckless trading.
For more information contact Jill Callanan at firstname.lastname@example.org
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