New Statutory Fiduciary Duties of Directors of Insolvent Companies

The European Union (Preventive Restructuring) Regulations 2022 were signed on 27 July 2022 to give effect to an EU directive (Directive (EU) 2019/1023). The Directive aims to ensure that member states have in place effective frameworks for early warning and prevention of corporate insolvency.

The Regulations introduce a number of changes to Ireland’s examinership regime to bring it in line with the requirements of the Directive. However, from a corporate governance perspective, the Regulations also introduce changes to the provisions of the Companies Act 2014 in order to give statutory recognition, for the first time, to the duty to have regard to creditors’ interests in certain circumstances.

Duty to have regard to the interests of creditors

It is a well-established principle of Irish law that the traditional fiduciary duties of directors, as set out in the 2014 Act, expand in circumstances where a company is insolvent so as to require the directors to have regard to the interests of the company’s creditors. The Regulations for the first time place that principle on a statutory footing. The Regulations introduce into the 2014 Act a fiduciary duty of directors to have regard to the interests of the company’s creditors “where the directors become aware of the company’s insolvency”.

The Regulations also introduce a requirement for a director of a company “who believes, or who has reasonable cause to believe” that the company is, or is likely to be, unable to pay its debts (within the meaning of the 2014 Act) to have regard to:

• The interests of the creditors
• The need to take steps to avoid insolvency, and
• The need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company

The awareness and belief of a director will therefore be relevant in determining whether the new statutory fiduciary duties introduced by the Regulations have arisen.

Breach and enforcement

The new statutory fiduciary duties of directors are enforceable in the same manner as the traditional fiduciary duties of directors. As fiduciary duties of directors are owed to their company and that company alone, creditors will not have a right of action against a director for breach of the duty to have regard to creditors’ interests. Enforcement of that duty will most likely occur where action is taken by a company acting through its liquidator.

Directors found to be in breach of their fiduciary duties may be liable to account to the company for any gain made directly or indirectly from the breach and/or to indemnify the company for any loss or damage resulting from the breach.

Conclusion

The changes introduced by the Regulations provide useful clarity as to the nature and extent of directors’ duties in the period approaching and during a company’s insolvency. Any director of an Irish company who is concerned about the company’s financial stability should take legal advice as to his/her company law obligations.

For more information, contact a member of our Corporate Governance & Compliance team.

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