Directors Duties and Liabilities: Statement from the ODCE

PUBLISHED: 10th June 2020

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.

Actions that can be taken against directors of insolvent companies

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.

Steps to ensure directors are properly fulfilling their duties

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: 

• closely investigate the financial position and the future prospects for the company; 
• continuously monitor the company’s financial position;
• support the view that the company can continue to trade through its financial difficulties with documentary evidence;
• obtain legal advice on the implications of any proposed material action (e.g. disposals, acquisitions, group restructuring).
•  hold frequent board meetings;
• prepare regular management accounts; 
• ensure that the company’s books and records are current and accurate; and 
• take material decisions only after considering the impact on creditors. 

Statement released by the Office of the Director of Corporate Enforcement

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:

• The ODCE will have regard to the impacts of the COVID-19 pandemic in its consideration of liquidators’ reports regarding the conduct of directors. 
• The ODCE will, in particular, consider the directors’ processes for monitoring the company’s financial position, whether the directors sought professional advice, the basis upon which the company directors formed the view that the company would be able to trade after these difficulties, the length of time that trading continued after the company was insolvent, the extent to which the company’s financial position began to deteriorate and the steps taken to reduce costs. 
• The statement provides that in circumstances where the directors’ decisions were made on the basis of verifiable evidence, made in good faith and the directors otherwise acted honestly and responsibly it would be unlikely that the ODCE would consider bringing restriction proceedings against the directors. 

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 jcallanan@lkshields.ie

The cross-disciplinary business crisis advisory team at LK Shields are available to provide practical advice and legal insights to employers, business owners, directors, insurance providers, compliance officers, HR professionals and decision-makers faced with a crisis.

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