Do your directors have sufficient tools available to alert them to circumstances that could indicate financial difficulties in a company and assist them in any future restructuring decisions?

Good Financial tools will enhance Directors' understanding a company's financial position and alert them to any early signs of potential financial difficulties.

Financial Difficulties

The European Union (Preventative Restructuring) Regulations, 2022 (the "Regulations") introduced into the Companies Act, 2014 (the "Companies Act"), a new statutory duty on directors who believe or who have reasonable cause to believe that a company is or is likely to be unable to pays its debts. The purpose of the Regulations is to assist businesses that are viable but in financial difficulty to continue to operate.

Directors now have a duty to have regard to the interests of creditors where they believe a company is or is likely to be unable to pay its debts. Directors in such circumstances must now, under the new section 224A of the Companies Act, have regard to:

• the interests of creditors,
• the need to take steps to avoid insolvency,
• and the need to avoid conduct that threatens the viability of the business of the company.

Early Warning Tools

The Regulations have also included a new section 271A into the Companies Act, which provides that directors may have regard to an "early warning tool" system to alert directors to the likelihood that a company will be unable to pay its debts.

An early warning tool is a mechanism which alerts directors of circumstances that could give rise to a company's actual or impending insolvency.

What are the Tools?

While there is no precise formula, companies should have the following systems and tools in place that could be used by directors to alert them to a likelihood that the company may be about to get into financial difficulties.

Such tools include:

• The continuous and consistent maintenance of adequate accounting records
• The preparation of accurate management accounts on a regular basis
• Regular budget and cashflow projections to ensure budgets are maintained and cashflows meet creditors
• An analysis of the collection of debts and the payment of suppliers
• The creation of an adequate system to ensure all ongoing tax is remitted

Use of these tools will enhance directors' understanding of whether the company is profitable, whether it is generating cash (and if not, why), the level of the company's debts and whether the company is in a position to discharge those debts as they fall due.

All the above is further reinforced by the obligation on directors to ensure that a company keeps adequate accounting records (section 281 of the Companies Act). Adequate records are those that are sufficient to record transactions of the company and enable the financial position of the company to be determined with reasonable accuracy. The use by a company of early warning tools will assist with this obligation.

Indicators of Potential Financial Difficulties

Directors should be on alert if the company experiences the following:

• Declining/rapidly declining sales,
• Loss of key contracts,
• Aged debtor profile deteriorating (i.e., customers taking progressively longer to pay),
• Company exceeding agreed credit terms without supplier approval,
• Suppliers unwilling or unable to supply,
• Increased reliance on a small number of suppliers,
• Company holding high volumes of slow moving or obsolete stock,
• Depleted/non-existent cash reserves,
• Late payment of essential services (e.g., rent, electricity),
• Late filing of Revenue returns to delay discharging debt,
• Bank and/or other providers of finance unwilling to advance additional funding/offering less favourable terms,
• Reliable cashflow forecasts indicating a deficit that cannot be met,
• Directors/management spending disproportionate amount of time dealing with problems as opposed to growing the business,
• Failure to meet obligations to the Revenue Commissioners, e.g., non-payment of obligations as they fall due.

Being alert to the above indicators will facilitate an ongoing critical analysis of the business of the company by the directors and assist in rebutting any breach of duty if financial difficulties do arise.

In circumstances where the directors have reasonable cause to believe that a company is, or is likely to be, unable to pay its debts, the directors should consider seeking professional advice.

For more information about the Regulations, please see the following article: Click here