The measures adopted by the Irish government at the beginning of the COVID-19 outbreak in an attempt to curb the spread of the virus mean that many companies now face significant challenges with regard to cashflow, liquidity and, in many cases, solvency. Now that restrictions are lifting and as trade resumes directors of Irish companies need to be particularly conscious of their duties under company law.
Technical insolvency arises where a company is either unable to pay its debts as they fall due or the company’s assets are insufficient to discharge its liabilities. The temporary measures to alleviate some of the fall-out from business interruption caused by COVID-19 led to concerns that availing of such schemes amounted to an admission of insolvency. The Revenue Commissioners provided clarity with regard to the Temporary Wage Subsidy Scheme to suggest that availing of this scheme will not be deemed by them to be a declaration of insolvency (we have reflected upon the insolvency considerations of this scheme in a separate article available here).
Directors’ Duties Where a Company is, or is Likely to Become Insolvent?
Directors owe fiduciary duties to every Irish company they direct. While these fiduciary duties are owed to the company alone, directors must have regard to the interests of shareholders and employees when exercising these duties. Where directors become aware that the company is, or is likely to become, insolvent the directors’ duties owed to shareholders (to act in good faith and to exercise the utmost care, skill and diligence) become secondary to an overriding duty to act in the best interests of the company’s creditors.
In acting in the creditors’ best interest, directors must take steps such as preserving the company’s assets so that they can be used to discharge liabilities and must not carry on business where they know, or ought to know, this would cause loss to the creditors. If directors fail to act in the best interests of the company’s creditors they are at risk of being held personally liable for all or some of the debts of the company.
What Practical Steps can Directors Take?
The critical issue for directors is to demonstrate that, on any objective analysis, they have made themselves aware of their duty of care and always discharged their duties and functions in good faith – acting honestly and responsibly. These practical steps can help directors ensure they are keeping themselves fully informed of the company’s position while also ensuring that companies are well placed to deal with the challenges that may arise in relation to COVID-19 even as business returns to normal:
- Take regular legal and financial advice and keep a record of that advice
- Hold regular board meetings to review the affairs of the company and keep detailed board minutes of decisions taken
- Engage with key stakeholders and manage cash flow
- Review key contracts
- Engage with lenders at an early stage
- Explore if a consensual resolution can be achieved with core creditors
- Check that the company has D&O insurance
- Work on a contingency plan (which may be liquidation) if the company cannot continue to trade
- Consider whether the company is in a position to avail of any of the measures introduced by the Irish Government to tackle COVID-19. (We have looked at the measures available to support businesses in a separate article available here).
Examinership is the key restructuring process which provides an opportunity a company with a reasonable prospect of survival to obtain a period of court protection, during which creditors are restrained from pursuing any legal action or remedies against the company. During this time the company and a court appointed examiner may formulate and present proposals for a rescue package restructuring the company (referred to as a scheme of arrangement). In certain circumstances where the directors believe that despite the insolvency (or anticipated insolvency) of the company that the company has a reasonable prospect of survival as a going concern the directors (or a shareholder or creditor) can apply to court for the appointment of an examiner. If the application is successful the examiner will have a period of protection from its creditors of up to 100 days to develop a plan to rescue the company.
Examinership is a complex process and is not without risk. Careful consideration of the merits of any application to appoint an examiner should be taken by the board of directors together with the companies’ legal and financial advisors prior to making any application.
What are the Key Risks Directors Face?
If a company ultimately ends up in an insolvent liquidation the directors and officers will face scrutiny by the liquidator, the Office of the Director of Corporate Enforcement (“ODCE“) and possibly the High Court. There are also risks of sanctions where a company continues to trade in circumstances it ought not to have done, due to its financial position. The key risks are as follows:
- There is a risk of restriction from acting as a director for five years or disqualification where a director has been found to be guilty of culpable wrongdoing
- Risk of personal liability for all the company’s debts if any officer has been a party to the carrying on of any business of the company in a reckless manner
- Risk of both criminal and civil liability where a person is knowingly party to the carrying on of the business of the company with intent to defraud creditors of the company.
The ODCE has provided guidance on the key considerations it will consider in determining whether directors of a company unable to pay its debts as they fall due in light of the COVID-19 pandemic have acted honestly and responsibly. We have discussed this guidance in more detail here, however the ODCE has noted that it will have due regard to the impact of the pandemic, whether the insolvency was a result of legitimate business failure and whether it was a consequence of events largely, and genuinely, outside the directors’ control.
William Fry’s Corporate Restructuring & Insolvency team can assist you in identifying the financial restructuring options available, provide advices regarding the duties owed by directors in an insolvency or potential insolvency scenario, as well as provide bespoke advices to companies regarding insolvency and contingency planning in general. Please contact Fergus Doorly, Craig Sowman, Ruairi Rynn or your usual William Fry contact for further information and assistance.
Contributed by Rebecca Martyn