Duties of Directors - An Update
The impact of COVID-19 and the ongoing response to same has seen businesses in Ireland face unprecedented levels of disruption and uncertainty. Whilst companies are faced with unique challenges as the scale of the pandemic and its response continues to evolve, directors remain subject to their duties and responsibilities under the Companies Act 2014 (the ‘Act’) and other statutory obligations including in respect of employment and health and safety. It is essential that directors when responding to these challenges are cognisant of their duties and responsibilities.
In an attempt to address certain difficulties faced by companies as a result of the pandemic the Department of Business, Enterprise and Innovation has published a general scheme of proposed legislation amending the Act, this includes a proposal to insert a new section into the Act which codifies a director’s duty to creditors as a company approaches insolvency.
DIRECTORS’ DUTIES IN TIMES OF FINANCIAL DIFFICULTY
Whilst Section 228 of the Act sets out the principal fiduciary duties of directors, in order to properly manage the running of a company and to protect themselves from potential personal exposure directors should be aware of their duties at times of financial difficulty for the business.
Should directors become aware that a company is insolvent, the interests of the creditors become the primary focus of their responsibilities. The directors should ensure that all material business decisions are documented at board meetings to demonstrate the good faith and sound judgement of the directors in continuing to allow the business to trade. Where a company is insolvent:
- The directors have a duty to put the company into voluntary liquidation. This duty is however qualified and in certain circumstances it may be deemed reasonable for directors to continue trading in order to determine whether the company can return to solvency.
- The directors must preserve the assets so that they can be applied in discharge of company liabilities.
- The directors have a duty not to make payments directly or indirectly to themselves to the detriment of the general and independent creditors of the company.
The Office of the Director of Corporate Enforcement (‘ODCE’) published a guidance in respect of their insolvency-related functions in the context of COVID-19. The guidance provides that when assessing liquidator reports the ODCE will have regard to the impact of the pandemic on the particular company and will also consider the following:
- The adequacy of the director’s processes and procedures for monitoring the company’s financial position on an ongoing basis and the point at which the directors sought advice relating to insolvency/impending insolvency.
- The basis upon which the directors formed the view that the company would be able to trade out of its difficulties within a reasonable timeframe and the length of time that trading continued after it had become apparent, or should have been apparent, that the company was insolvent.
- The extent to which the company’s financial position continued to deteriorate, and the nature of any additional financial liabilities that accrued, during the period which the directors knew, or should have known, that the company was insolvent.
- In cases where there are material tax liabilities involved, the extent to which such liabilities arose prior to, or during, the pandemic and, where they arose during the pandemic period, the extent to which the company availed of, and complied with, the Revenue Commissioners’ requirements for deferred payment and warehousing of liabilities.
- The steps taken to reduce costs and/or to restructure the business.
The guidance confirms it is unlikely that a declaration of restriction will be made against directors of a company which becomes insolvent, provided their decisions and judgments were made on the basis of objectively verifiable evidence, were based on reasonable assessments and assumptions and were made honestly, responsibly and in good faith.
Separately the ODCE has acknowledged the stated position of Revenue that a declaration made as part of an application for the COVID-19 Temporary Wage Subsidy Scheme is not a declaration of insolvency.
DIRECTORS’ LIABILITY AND RISK
In addition to facing restriction or disqualification from acting as a director:
- Where a director is found to be in breach of their duties, they may be required to indemnify the company for any loss or damage arising from the breach and/or to account to the company for any profit which they may have made through the breach.
- Directors may be made personally liable for the liabilities of an insolvent company if they have knowingly carried on the business in a reckless manner. A defence to such liability is that the director acted honestly and responsibly. In considering such recklessness the courts will have regard to the directors’ position and experience.
- Directors may be made personally liable for the liabilities of an insolvent company where they knowingly carried on the business with an intent to defraud creditors.
- Directors may be made personally liable for the liabilities of an insolvent company where their failure to maintain proper books of account contributed to the company’s insolvency, resulted in substantial uncertainty as to the assets and liabilities of the company or impeded an orderly winding up.
- A liquidator or creditor can seek the return of property where the disposal of the property had defrauded the company, its creditors, or members. It is the effect of the transaction that is considered, accordingly it is not necessary to prove any intent to defraud and there is no limitation on the time the transaction must have been made in.
- A liquidator may seek to have the transfer of company property to creditors made in the six months prior to the insolvent winding up declared void. The six-month period extends to two years where the transaction was made in favour of a connected person. The liquidator must prove that the directors intended to prefer that creditor to the detriment of other creditors.
- A director may be found to be criminally liable if the company commits an offence under the Act and the director is an officer ‘in default’. A director will be considered an officer in default if they authorise a default or in breach of his or her duty to the company, permit the default which led to the company committing the offence.
For further information please contact Andrea de Courcey (Solicitor), Eoin Mackessy (Solicitor), or your usual AMOSS contact.