As businesses emerge from lockdown many directors are concerned regarding their personal exposure if they continue to trade but the business ultimately fails.
In an insolvent liquidation directors face the possibility that a liquidator may bring a court application to have them restricted from acting as Directors of other companies. This will not occur if the liquidator and the ODCE are satisfied that the directors have acted honestly and responsibly.
Directors also face the possibility of personal liability being imposed upon them for some or all of the debts of the business in certain circumstances but this is extremely unlikely if the ODCE is satisfied that the directors have acted honestly and responsibly.
On 4 June 2020 the ODCE issued guidance regarding its approach to directors’ conduct and whether or not restriction is appropriate. The key take aways are:
- ODCE would generally not consider directors to have acted dishonestly or irresponsibly in circumstances where the company has become insolvent as a consequence of events largely, and genuinely, outside the directors’ control.
- It is the actions taken, or not taken, by the directors in response to financial difficulties being faced by the company that will inform the assessment as to whether directors should face a restriction application (or undertaking as the case may be).
- Whilst continuing to trade while insolvent would generally give rise to a significant risk that the directors concerned could face restriction proceedings (and possibly other consequences depending upon the relevant facts and circumstances), ODCE acknowledges that the Courts have demonstrated a willingness to afford some latitude to continue trading for a short period in certain circumstances. The extent of latitude is generally contingent upon (i) there having been a reasonable prospect that the company would be able to trade out of its difficulties in a relatively short timeframe; and (ii) the directors having acted in good faith and having acted honestly and responsibly in all other respects.
- Where companies enter insolvent liquidation over the coming months, the ODCE have indicated that it will have due regard to the impacts of the pandemic as it carries out its functions.
- In assesing the conduct of directors the issues that ODCE will have regard to, will include:
a) the adequacy of the directors’ processes and procedures for monitoring the company’s financial position on an ongoing basis;
b) whether, and if so at what point, directors sought professional advice relating to the insolvency/impending insolvency;
c) the basis upon which the company’s directors formed the view that the company would be able to trade out of its difficulties within a reasonable timeframe (which might include, for example, the potential impact of access to Government grants, loans and other supports, both already announced and in prospect);
d) the length of time that trading continued after it had become apparent, or should have been apparent, that the company was insolvent;
e) 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;
f) 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;
g) the steps taken to reduce costs and/or to restructure the business.
- Provided that directors’ decisions and judgements were:
a) made on the basis of objectively verifiable evidence;
b) based on assessments and assumptions that were reasonable in the context of the circumstances pertaining at the relevant times;
c) made in good faith; and
d) the directors otherwise acted honestly and responsibly,
it is unlikely that the ODCE will consider that the company directors concerned should be restricted.
ODCE’s guidance does not amount to complete absolution for directors who continue to trade where the business ultimately fails. Whether or not directors face restriction or more serious consequences for continuing to trade over the coming months will turn on the facts of each case. However, ODCE’s guidance does give very welcome comfort to directors who are making honest and responsible efforts to navigate through the unprecedented uncertainty caused by the pandemic.