Directors’ Duties and Responsibilities when Financial Difficulties Arise

The Corporate Enforcement Authority has published an Information Note to assist directors in understanding their duties in circumstances where companies are in financial difficulty. Restructuring & Insolvency partner, James Morrin examines the key duties and some of the steps that directors of such companies should be taking.

The Preventative Restructuring Directive

The European Union (Preventive Restructuring) Regulations 2022 (the Regulations) transposed the requirements of EU Directive 2019/1023 (the Preventative Restructuring Directive) into Irish law.

Certain of the consequential amendments to the Companies Act 2014 (the Act) relate to the duties and responsibilities that directors of companies have in circumstances of financial difficulty and/or insolvency[1].

The Corporate Enforcement Authority (CEA) has recently issued a helpful information note[2] to assist directors in understanding their duties and responsibilities in this regard.

Directors’ duties in situations of financial difficulty

It has long been the case that directors owe a common law duty to have regard to the interests of creditors in circumstances where a company is insolvent[3].

The insertion of Section 224A into the Act on foot of the Regulations puts on statutory footing a duty to “have regard to”, among other things:

• The interests of creditors, and
• The need to take steps to avoid insolvency

These duties, which are owed to the company alone, arise in circumstances including where a director believes or has reasonable cause to believe that the company is unable to pay its debts as they fall due, or is balance sheet insolvent, i.e. the value of its assets is less than its liabilities taking into account contingent and prospective liabilities[4]. In other words, the above duties arise where insolvency is merely likely. Directors also owe a duty to have regard to the interests of creditors in situations where they become aware of the company’s actual insolvency[5].

The consequences to directors of non-compliance with these duties are significant and include potential unlimited personal liability for the debts of the company, and exposure to restriction or disqualification.

Therefore, it is critically important that directors of companies in financial difficulty are fully aware of their duties and responsibilities and that they are taking all necessary and appropriate steps to fulfil them.

“Early Warning Tools”

Under section 271A of the Act, directors may have regard to “early warning tools”, which are defined as:

“mechanism[s] 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 CEA has emphasised the importance of directors maintaining an awareness, on an ongoing basis, of the company’s financial position. This is particularly so given the statutory duty to maintain adequate accounting records[6].

Further, in the Note the CEA has:

1. Highlighted the importance of maintaining such records and management accounts on a continuous and consistent basis in order to ensure that the directors have sufficient understanding of whether the company is profitable and what if any funding requirements it may have, and
2. Set out a non-exhaustive list of indicators[7] of financial difficulties that directors should have regard to, including:
   • Declining sales or depleting cash reserves
   • Contractual obligations to fulfil loss making contracts
   • Customers taking progressively longer to pay
   • Inability to meet demand due to supply chain issues
   • Inability to retain/attract staff

Restructuring options

Directors of companies in financial difficulty should be aware of and seek professional advice in relation to any suitable restructuring options available.

The options include informal restructuring, such as negotiating with key creditors and counter parties, and the formal restructuring procedures including SCARP, examinership and schemes of arrangement under Part 9 of the Act.

Timely and informed engagement with relevant stakeholders is key to a successful outcome.

For more information on directors' duties when financial difficulties arise, contact a member of our Restructuring & Insolvency team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.

[1]See our previous article on corporate governance implications of the Preventative Restructuring Directing in Ireland: https://www.mhc.ie/latest/insi...

[2]https://cea.gov.ie/Portals/0/Information%20Notes/Information%20Note%202023_1%20PRD%20FINAL.pdf?ver=vjIczTMIY2EloUrBrgc6CQ%3d%3d

[3] See Re Fredericks Inns [1993] IESC 1

[4] Section 509 (3) of the Companies Act 2014

[5] Section 228 (i) of the Companies Act 2014

[6] Per Section 281 of the Companies Act 2014

[7] See Appendix 1 of the Note.