Update on Directors’ Duties in Insolvency 5 April 2023

It’s no surprise that company directors worry about their duties, responsibilities and possible liabilities if their business is facing financial difficulties. They are right to do so because directors’ duties change where a company is or is likely to become insolvent. For most company directors, insolvency is uncharted territory.

In order to assist company directors in this situation, a new Information Note has been issued by the Corporate Enforcement Authority (“CEA”) that sets out how they
view the newly codified fiduciary duty of directors in circumstances where a company is about to become or has become insolvent.

The guidance is in response to the introduction of the European Union (Preventative Restructuring) Regulations 2022 (“the Regulations”) which are concerned with companies which are facing financial difficulties.

This newsletter summarises the key aspects of the Information Note in relation to the requirements and approach that directors are expected to follow when they find themselves overseeing a company which has become insolvent.

Directors must understand these matters to avoid unknowingly breaking the law and risking directorial misconduct sanctions. A more detailed analysis of the Information Note can be found on our website here.

A primary duty of company directors is to know the financial position of their company at all times. Therefore there is a basic requirement to maintain adequate books and records. These books and records will then allow the directors to assess at any point in time if the company is insolvent and adopt an appropriate course of action if this is found to be the case. At such a point in time directors have a duty to put creditors’ interests first.

The directors must carefully consider if it is appropriate to continue or cease trading and be able to justify their decision as it could be later challenged if the company
has a liquidator appointed.

The directors can take a short period of time to consider alternative strategies and usually do so by engaging the services of an insolvency practitioner who might advise on a range of alternatives, from restructuring options to save some or all of the business to the immediate winding up of the company through a liquidation.

The key aspects addressed in the CEA Information:

Note which expands on the above are summarised as follows:
• the legal requirement to maintain adequate accounting records,
• the importance of maintaining adequate accounting records,
• definitions, explanations and tests of a company being in financial difficulty, being
unable to pay its debts and being insolvent respectively,
• the general duties of company directors,
• the specific duties of company directors where a company is in financial difficulty, and
• the potential consequences of non-compliance with company directors’ duties. The CEA Information Note also:
• provides an non-exhaustive list of easy to understand indicators which can help
company directors to identify at an early stage whether a situation might be developing in which the company would be unable to pay its debts • sets out certain key steps that ompany directors can take to ensure, on an ongoing basis, that they are aware of a company’s financial position, and • provides details of the various restructuring
options open to companies where financial difficulties are being experienced, including
SCARP and examinership.

Finally the CEA Information Note recommends that directors of companies to whom the Regulations apply should carefully consider seeking professional advice at the earliest appropriate opportunity.

Courtesy of CROWE business advisory firm