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 court 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.
Common law duty of directors of insolvent companies to have regard to the interests of creditors
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 court 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.
New statutory duty
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 insolvency1).
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.
Going beyond the common law duty
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.
Conclusion
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. However, the novel duties created by, and the broad meaning of “unable to pay its debts” under, section 224A denote a new departure and 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.
For more information or assistance please contact one of our Corporate and Commercial lawyers.
1Directive (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
