Directors’ duties in company insolvency

Director’s duties in company insolvency - Crowe Ireland

Company directors are responsible for managing the affairs of a company, and with those responsibilities comes certain fiduciary duties. These duties were previously not set out in legalisation but were defined by case law. However, with the introduction of the Companies Act 2014, these duties are now codified and are set now out in Section 228 of the Act.

Fiduciary duties of directors:

  • To act in good faith in what the director considers to be the interests of the company
  • To act honestly and responsibly in relation to the conduct of the affairs of the company
  • To act in accordance with the company’s constitution and to exercise his or her powers only for the purposes allowed by law
  • Not to use the company’s property, information or opportunities for his or her own or anyone else’s benefit
  • Not to agree to restrict the director’s power to exercise an independent judgment
  • To avoid any conflict between the director’s duties to the company and the director’s other (including personal) interests unless the director is released from his or her duty to the company in relation to the matter concerned, whether in accordance with provisions of the company’s constitution in that behalf or by a resolution of it in general meeting
  • To exercise the care, skill and diligence which would be exercised in the same circumstances by a reasonable person having both
    • the knowledge and experience that may reasonably be expected of a person in the same position as the director, and
    • the knowledge and experience which the director has
  • To have regard to the interests of the company’s employees in general and its shareholders

As can been seen from the above company directors are expected to act in good faith in relation to the interests of the company. However, company directors need to be aware that their responsibilities change if their company faces insolvency.

When a company becomes insolvent (if the company cannot pay its debts as they fall due and / or the company’s liabilities exceed its assets) the duty of the directors switches to act in good faith in relation to the interests of the creditors of the company.

This does not mean that directors should decide to wind up a company at the first instance of being unable to make a payment within credit terms. It may be that by continuing to trade, a more favourable outcome for creditors is achieved.

Here we outline a number of factors for company directors to consider when a company is facing insolvency.

Creditors

The directors and company at that point in time now have a duty of care to the creditors and care needs to be taken to ensure that the any further losses by the creditors are minimised. A director should be satisfied that any further credit incurred by the company is done with the firm belief that the company can repay the debt.

Care is also needed to ensure that certain creditors are not unfairly preferred over others. Any payments made in the six months prior to a liquidation of a company can be scrutinised and if they are found to unfairly prefer one payee over other creditor, a liquidator can seek to unwind the transaction. This review period is extended to two years if payments are made to connected persons.

Assets

Directors have a duty of care to ensure that the assets of the company are preserved for the company’s creditors. In a recent case involving the directors of Kelly Trucks Limited (in voluntary liquidation) the courts found that €838,000 worth of assets in Kelly Trucks Limited were fraudulently disposed of to a connected company with a view to defrauding creditors. The court ruled that the directors were personally liable for the debts of the company, ordered that the assets be returned to the liquidator by the connected company and disqualified the directors from acting as directors of a company for a period of seven and a half years. This highlights, in extreme circumstances, the serious repercussions that directors who have failed in their duties could face.

Reasonable prospect of survival

As a director of a company facing insolvency, it is essential that you maintain accurate and up-to-date financial information on the company and be able to determine at any given time the financial positon of the company.

In a situation where a company continues to trade where it is insolvent and does not have a reasonable prospect of continuing to trade, a director may be found guilty of reckless trading if:

  • having regard to the general knowledge, skill and experience that might reasonably be expected of a person in that position, he or she ought to have known that his or her actions or those of the company would cause loss to any creditor of the company, or
  • he or she was a party to the contracting of new company debt and did not honestly believe on reasonable grounds that the company would be able to pay this or other debts when falling due.

Seek professional advice

If a director is of the opinion that their company is facing insolvency they should seek professional advice. A professional advisor will be able to independently assess the business and either assist in turning the business around or advise on winding up of the company in an orderly manner. Seeking the help of a qualified advisor can also protect against any restrictions or liabilities a director might otherwise face. It is important for directors to maintain a record of any advice to demonstrate that the appropriate steps were taken when facing potential insolvency.

If you wish to find out more about any aspect of the above or wish to seek professional advice about restructuring or winding up a business, please do not hesitate to contact our restructuring and insolvency team for a confidential consultation.