After a lull during the pandemic, it is expected that the number of company insolvencies in Ireland will increase as financial pressures on businesses intensify following the withdrawal of temporary government supports. Recent changes to directors’ duties bring into sharp focus the actions of, and decisions taken by, company directors in the period leading up to the insolvent liquidation of a company.
It is well established under Irish case law that company directors who are aware of the company’s insolvency have a duty to have regard to the interests of the company’s creditors. However, until recently, this duty was never provided for in Irish companies legislation. Furthermore, Irish judgments concerning the common law duty to have regard to the interests of creditors did not clarify whether the duty is owed to the company (as is the usual position as regards directors’ duties) or to the creditors.
Section 224A and section 228(1)(i) of the Companies Act 2014 (the “Companies Act”) are new provisions that have, along with several other amendments to the Companies Act, been introduced by the European Union (Preventive Restructuring) Regulations 2022 (which give effect to an EU Directive on restructuring and insolvency ).
The new provisions put the common law duty of directors of insolvent companies to have regard to the interests of creditors on a statutory footing. Like in the case of the statutory duty of directors to have regard to the interests of employees and members of the company, the new provisions explicitly state that the duties thereunder are owed to the company and the company alone; accordingly, it is now clear that the duty does not provide creditors with a direct right of action against directors.
The common law duty to have regard to the interests of creditors required the directors to be aware of company’s insolvency. Similarly, section 228(1)(i) of the Companies Act includes an awareness requirement in providing that “[a] director of a company shall… have regard to the interests of its creditors where the directors become aware of the company’s insolvency.”
In contrast, the duty placed on directors under section 224A to have regard to the interests of creditors arises where a director “believes [or] has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts”. The term “unable to pay its debts” has the broad meaning given to that term under section 509(3) of the Companies Act.
In addition, under section 224A, the circumstances giving rise to the duty to have regard to the interests of creditors will also give rise to the duty to have regard to: (i) “the need to take steps to avoid insolvency”; and (ii) “the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company”.
Therefore, while section 228(1)(i) effectively restates the common law duty, section 224A goes further by creating two additional duties. Additionally, directors should be mindful of the broad meaning given to the term “unable to pay its debts” under section 224A.
Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 Sections 224A and 228(1)(i) place the duty of directors of insolvent companies to have regard to the interests of creditors on a statutory footing for the first time. The new provisions provide some welcome clarity by removing any ambiguity around whether the duty is owed to creditors by expressly providing that the duty is owed to the company and the company alone. The new provisions have implications for directors and D&O insurers as they may strengthen an insolvency practitioner’s ability to recoup losses against directors of an insolvent company where such directors have been remiss in their duties under the new provisions. It is expected that D&O insurers will monitor any rise in company insolvencies closely with a view to assessing whether the new duties bring about an increase in claims against directors. It will be interesting to see how these new provisions will be interpreted by the Irish courts. In the meantime, company directors should be alert to any indication that the company might be in financial difficulty and should be cognisant of their duties in this regard.
