The Office of the Director of Corporate Enforcement (ODCE) has recently issued welcome guidance on how the impact of COVID-19 will be considered by the ODCE when evaluating potential restriction cases in respect of directors of insolvent companies – see here.
Directors of companies that enter into an insolvent liquidation are at risk of restriction where a liquidator must report on the conduct of the directors to the ODCE. The liquidator is also obliged to pursue the restriction of the directors unless relieved of that obligation by the ODCE (or where the director provides a restriction undertaking to the ODCE).
With an anticipated significant increase in insolvent liquidation arising from the COVID-19 pandemic the guidance from the ODCE should provide some comfort to the directors of companies who but for the impact of the pandemic would be solvent and who have taken appropriate steps to manage the impact of the pandemic on the business of the company, some of which are helpfully identified in the recent guidance.
The guidance by the ODCE does not represent a change in the law, but rather a helpful clarification of how the conduct of directors and reports received from liquidators of insolvent companies will be considered by the ODCE.
Guidance on Impact of COVID-19
In its latest guidance the ODCE outlines that directors are not considered to have acted dishonestly or irresponsibly in circumstances where a company has become insolvent because of events largely, and genuinely, outside the directors’ control. Specifically, the ODCE has stated that it will have due regard to the impact of the pandemic in determining whether a liquidator should initiate restriction proceedings or seek restriction undertakings.
In examining whether to bring restriction proceedings against a director, the ODCE will consider several factors, including the basis on which the directors decided the company would be able to trade out its difficulties within a reasonable timeframe. This might include the impact of access to government grants, loans and other supports, both announced and expected. In relation to tax liabilities, the ODCE said it will consider whether those liabilities arose before or during the pandemic. Where tax liabilities arose during the pandemic the ODCE it will consider whether the company availed of Revenue’s requirements for deferred payment and warehousing of liabilities. The ODCE also noted the Revenue Commissioners’ stated position that a declaration made as part of an application for the COVID-19 Temporary Wage Subsidy Scheme was not a declaration of insolvency which was a point that had given rise to some concern at the time of the launch of the scheme.
Other key considerations which will be relevant to the ODCE’s determination include:
- the adequacy of the directors’ processes and procedures for monitoring the company’s financial position on an ongoing basis;
- whether, and if so at what point, directors sought professional advice relating to the insolvency/impending insolvency;
- 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, as well as the nature of any additional liabilities that accrued, during the period during which the directors knew, or ought to have known, that the company was insolvent; and
- the steps taken to reduce costs and/or restructure the business.
The guidance shows that the ODCE will, as it has in the past, be cognisant of the external factors that can impact a company.
Ultimately it is the actions taken (or not taken) by the directors of a company facing insolvency and not the mere fact of insolvency that will inform the ODCE’s assessment as to whether such directors should face a restriction application. This analysis is also applicable to any actions that any other parties, such as a creditor’s attempt to make a director personally liable for reckless trading, may seek to pursue against directors of an insolvent company.
Please contact any member of our Restructuring & Insolvency Team or your usual William Fry contact, if you wish to discuss the impact of COVID-19 or any of the matters raised in this article.
Contributed by Eógan Hickey, Treasa Kelly