EU imposes higher duties on company directors
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The Corporate Enforcement Authority (CEA) has recently issued an information note, which provides guidance to directors in respect of early warning tools, director's duties and restructuring processes for companies in financial difficulty.
The information note is aimed at assisting directors in understanding their obligations pursuant to the European Union (Preventive Restructuring) Regulations 2022 (the EU Regulations). Given the difficulties faced by businesses post Covid and particularly the current energy crisis, the information note is a helpful reminder of the standards which must be met to ensure directors are compliant with their statutory duties and the options available to directors who are concerned about financial difficulties.
- Early warning tools
The EU Regulations provide that a director may have regard to early warning tools, which is defined as "a mechanism to alert the directors of the company to circumstances that could give rise to a likelihood that the company concerned will be unable to pay its debts and can identify the restructuring frameworks available to the company and signal to such directors the need to act without delay".
The information note stresses the importance of directors maintaining adequate accounting records on a continuous and consistent basis (which is a statutory requirement). It also provides that consideration of management accounts, supplemented by proper budgeting and cashflow forecasting and having regard to the challenging environment will allow 'responsible directors' plan and take the necessary measures to mitigate risk.
To assist company directors identify, at an early stage, whether an insolvency situation may be developing, a list of indicators or early warning signs is annexed to the information note. Declining sales, aged debtors, high volume of stock and late filing of Revenue returns are all included as indicators of financial difficulties.
The information note stresses the importance of directors maintaining adequate accounting records on a continuous and consistent basis (which is a statutory requirement). It also provides that consideration of management accounts, supplemented by proper budgeting and cashflow forecasting and having regard to the challenging environment will allow 'responsible directors' plan and take the necessary measures to mitigate risk.
To assist company directors identify, at an early stage, whether an insolvency situation may be developing, a list of indicators or early warning signs is annexed to the information note. Declining sales, aged debtors, high volume of stock and late filing of Revenue returns are all included as indicators of financial difficulties.
- Restructuring
In terms of taking steps to avoid a liquidation scenario, the earlier that a company can detect its financial difficulties and take the appropriate action, the higher the probability of success of a restructuring process. There are a number of restructuring rescue processes available to Irish companies, including examinership, the Small Company Administrative Rescue process (SCARP), informal restructuring arrangements and schemes of arrangement. If directors seek the necessary advices in time, one of these processes could be used to restructure and ultimately save the business.
- Duties on Insolvency (or Potential Insolvency)
The information note warns directors that where they have reasonable cause to believe that a company is, or is likely to be, unable to pay its debts, their duties under the Companies Act, 2014 (CA 2014) are triggered.
The EU Regulations have imposed an additional statutory duty on directors. Section 224A(1) CA 2014 provides that a director of a company who believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts shall have regard to:
a) the interests of the creditors,
b) the need to take steps to avoid insolvency, and
c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company.
Therefore where a director has cause to believe that the company is, or is unlikely to be unable to pay its debts, their duty shifts from the interests of the shareholders to having regards to the interests of creditors. While this obligation was in place in common law, it now has specific statutory effect.
The EU Regulations have imposed an additional statutory duty on directors. Section 224A(1) CA 2014 provides that a director of a company who believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts shall have regard to:
a) the interests of the creditors,
b) the need to take steps to avoid insolvency, and
c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company.
Therefore where a director has cause to believe that the company is, or is unlikely to be unable to pay its debts, their duty shifts from the interests of the shareholders to having regards to the interests of creditors. While this obligation was in place in common law, it now has specific statutory effect.
- Potential consequences of non-compliance with directors’ duties
Directors should be mindful that they can be penalised for breach of their statutory duties, they may be subject to restriction or disqualification orders and can be made personally liable for some or all of a debts of the company. In certain circumstances, company directors can also be held criminally liable for breaches of company law. It is, therefore, imperative that directors are aware of their increased duties and obligations under company law.
The best way to ensure that you as a director are meeting your statutory duties and responsibilities is to seek and comply with professional advice as soon as there are warning signs. The information note advises company directors to consider seeking the advice of their professional advisor at the earliest available opportunity if they have concerns that the company is facing financial difficulties. The insolvency and restructuring team in Fieldfisher are experienced in advising directors of their duties and in assisting struggling businesses enter into restructuring processes.
Written by Mark Woodcock and Ciara Gilroy.
The best way to ensure that you as a director are meeting your statutory duties and responsibilities is to seek and comply with professional advice as soon as there are warning signs. The information note advises company directors to consider seeking the advice of their professional advisor at the earliest available opportunity if they have concerns that the company is facing financial difficulties. The insolvency and restructuring team in Fieldfisher are experienced in advising directors of their duties and in assisting struggling businesses enter into restructuring processes.
Written by Mark Woodcock and Ciara Gilroy.