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The European Union (Preventative Restructuring) Regulations 2022 (the “Restructuring Regulations”) were introduced on 27 July 2022 with immediate effect.
You can read our overview of the regulations, specifically the changes they impose on the examinership process and a short overview of the changes imposed on the Companies Act 2014, here.
For the first time, the regulations impose a statutory obligation on a company director to have regard for the interests of creditors in relation to a company which is facing financial difficulty.
The responsibilities of a company director are diverse and expansive. The origin of these responsibilities arises from both statute and common law and implicit in these responsibilities is the director’s role as a fiduciary. A director’s primary fiduciary duty is owed to the company and to the company alone, a commitment which is underlined in S228(a) of the Companies Act 2014.
In addition to this statutory obligation, the Irish Courts have also long recognised the duty of care a director of a company would have to creditors in a scenario where a company is unable to pay its debts. However, the Restructuring Regulations have now codified that duty and impose a statutory obligation on directors to have regard to the interests of creditors with the amendment of the 2014 Companies Act (the “2014 CA”).
The Restructuring Regulations amend the 2014 CA and require that directors of companies unable, or likely to be unable, to pay their debts, must have regard to the interests of creditors. The 2014 CA has been amended with the insertion of a new section 224A into Part 2 which provides the following:
Section 224A(1)
“A director of a company who believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts, within the meaning of section 509(3), shall have regard to:
a) the interests of the creditors,
b) the need to take steps to avoid insolvency, and
c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company”
When are the obligations triggered?
The reference to section 509(3) in the new section 224A(1) is important as it reiterates the existing assessment already contained within the 2014 CA in relation to a company’s ability to pay its debts as they fall due. Section 509(3) states the following:
A company is unable to pay its debts if—
(a) it is unable to pay its debts as they fall due,
(b) the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities, or
(c) the circumstances set out in section 570 (a), (b) or (c) are applicable to the company.
The inclusion of the wording from Section 509(3) certainly broadens the scope of a director’s obligations when compared with that which originally existed under common law and qualifies the meaning of what “unable to pay debts” constitutes.
Consequently, if a company is unable to pay its debts as they fall due and the value of its assets is less than its liabilities, then a company director is mandated to take into account the interest of creditors and shall take all relevant steps to avoid the insolvency of the company.
Early warning tools
The Restructuring Regulations also insert a new section 271A into the 2014 CA which provides that
“(1) A director may have regard to early warning tools.
(2) For the purposes of this section, an early warning tool means a mechanism to alert the directors of the company to circumstances that could give rise to a likelihood that the company concerned will be unable to pay its debts and can identify the restructuring frameworks available to the company and signal to such directors the need to act without delay”.
The purpose of the early warning tools is to encourage companies to focus on their financial performance and to alert them to any threats that may threaten such performance. The key is that the company continues to remain viable and is able to trade.
The Corporate Enforcement Authority (“CEA”) has set out key information and corrective steps that companies can adopt to ensure they retain a capacity to trade. The CEA’s guidance sets out a non-exhaustive list of “Indicators of Financial Difficulties” that should be considered including cashflow and funding triggers, supplier credit terms and debtor profile analysis that a company director should be taking into consideration. Such considerations should ensure that the financial status of a company is monitored and maintained at all times.
Consequences of non-compliance with directors’ duties
Directors of a company must ensure that they understand and adhere to their fiduciary and financial obligations regarding the company. In the event of any non-compliance, a director can be penalised for breaching their statutory duties which in turn can result in a director being restricted, disqualified, or made personally liable for the company’s debts and in certain circumstance, even face criminal sanctions.
Conclusion
With the new Restructuring Regulations, it has been made clear that a director of a company who believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts, owes a fiduciary duty to the company and must have regard for the interest of creditors. As noted by the CEA, these duties are significant and in circumstances where directors have an actual awareness of insolvency, consideration should be given by the directors to seeking professional advice.