COVID-19 – Welcome Comfort for Directors Trying to Rebuild their Businesses

The Office of the Director of Corporate Enforcement (ODCE) has provided guidance on its approach to directors of companies, made insolvent by the COVID-19 pandemic, who act in good faith on objective evidence in trying to rebuild their businesses.

The issue

The consequences of the COVID-19 crisis have made many businesses that were solvent, and will likely become solvent again, technically insolvent.

One of the real concerns in the minds of directors faced with this scenario has been what might happen to them personally where such companies continue to trade with a view to financial recovery but ultimately fail.

When a company goes into insolvent liquidation, the liquidator must bring proceedings against the directors, seeking to restrict them acting as directors, unless the ODCE grants the liquidator relief from doing so. The ODCE must be satisfied that the directors acted honestly and responsibly, based on a report from the liquidator.

Separately, the directors can face various proceedings seeking to impose personal liability on them for the debts of the company. Such proceedings are unlikely (and very unlikely to succeed), if the ODCE grants relief from bringing restriction proceedings.

The guidance

On 4 June 2020, the ODCE issued a guidance document.^[1]. The key points of that guidance are:

• If a company has become insolvent because of events outside the directors’ control, the ODCE would not generally consider that they have behaved improperly.

• It is the actions taken, or not taken, by the directors in response to financial difficulties being faced by the company that will inform the assessment as to whether directors should face a restriction application (or undertaking as the case may be).

• The ODCE notes that the courts allow some latitude to continue to trade while insolvent where:

  • there is a reasonable prospect of survival; and

  • the directors have acted honestly and responsibly in other respects.

• If companies enter insolvent liquidation, what the ODCE will look at will include:

  • the adequacy of the directors’ processes and procedures for monitoring the company’s financial position;

  • whether the directors sought appropriate professional advice;

  • the basis on which the directors formed the view that the company would be able to trade out of its difficulties, including grants, loans and other supports;

  • how long trading continued after it should have been apparent that the company was insolvent;

  • how much the position deteriorated and what kind of additional liabilities accrued after it should have been apparent that the company was insolvent;

  • if there are significant tax liabilities, whether the company availed of, and complied with, the Revenue Commissioners’ requirements for deferred payment and warehousing of liabilities; and

  • the steps taken to reduce costs and/or to restructure the business.

The bottom line – what does this mean in practical terms?

Provided that the directors’ decisions are:

• made on the basis of objectively verifiable and sufficiently detailed information;

• based on assessments and assumptions that were reasonable in the context of the circumstances pertaining at the relevant times;

• made in good faith; and

• the directors otherwise acted honestly and responsibly,

it seems unlikely that the ODCE will consider that directors of companies which ultimately fail as a result of the crisis should be restricted.

Comment

Needless to say, the ODCE cannot say that no directors of companies that have been made insolvent by the COVID-19 crisis will be subject to restriction order proceedings, as each case will be examined on its facts and the steps taken by the directors in totality.

However, it ought to offer a reasonably high degree of reassurance to those directors who are attempting to make genuine efforts to rescue businesses from financial difficulty, in the context of unprecedented uncertainty in almost every sector.

It appears very unlikely that individuals would face restriction or disqualification proceedings if they behave honestly and responsibly, in particular, by:

• formulating a realistic business plan, which considers a number of possible scenarios and is supported by cash flow forecasts;

• ensuring a proper documented division of responsibilities, including delegation of maintenance of the company’s books and records to a competent person;

• holding regular board meetings at which accurate and up to date management accounts are available;

• getting outside professional advice, as appropriate;

• considering restructuring options, if appropriate;

• keeping creditors up to date, especially where seeking additional credit; and

• putting the company into liquidation promptly, if it becomes clear that it cannot survive.

Fundamentally, this guidance confirms the advice that insolvency lawyers have been giving to companies verging on insolvency for many years regarding the behaviour expected of directors.

It is to be welcomed that the ODCE has produced nuanced guidance that will protect directors who act honestly and responsibly without suspending the whole reckless trading regime and potentially providing a charter for the truly reckless.