Eoin Brereton: COVID-19 guidance offers reassurance to company directors
Eoin Brereton, partner at Philip Lee, considers new guidance on directors’ duties during COVID-19.
On 4 June 2020 the Office of the Director of Corporate Enforcement (ODCE) issued welcome guidance for directors of companies that ultimately become insolvent because of the COVID-19 pandemic. This guidance is welcome and is in line with representations made by Philip Lee at the outset of the COVID-19 pandemic.
COVID-19 has affected almost every business sector with many businesses having had to close temporarily – some will reopen and thrive, others may not reopen at all and those that do may unfortunately not survive.
Directors of a business that does not survive due to insolvency face a real risk of restriction proceedings being brought against them with the added worry of potentially being held personally liable for company debts in certain circumstances.
The updated guidance provided by the ODCE is welcomed by us at Philip Lee as it provides directors with some comfort that the ODCE will not generally look to restrict directors who have acted honestly and responsibly in circumstances where the company has become insolvent as a consequence of events “largely, and genuinely, outside the directors’ control”.
The ODCE will consider each company’s case on its own merits and will take into account both the report submitted by the liquidator and any other relevant information which it may have obtained independently of the liquidator. When determining whether a director has acted honestly and responsibly the ODCE has said it will consider the following:
- the adequacy of the directors’ processes and procedures for monitoring the company’s financial position – this highlights how important regular, accurately minuted board meetings are at times of crises like this;
- whether the directors sought professional advice;
- the basis upon which the company’s directors formed the view that the company would be able to trade out of its difficulties within a reasonable time frame;
- the length of time that trading continued after it had become apparent that the company was insolvent;
- the extent to which the company’s financial position continued to deteriorate, as well as any additional liabilities that accrued during the period that the company was insolvent;
- where the company has tax liabilities, the extent to which 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 ODCE offers further reassurance to directors by indicating that companies that continued to trade in the current circumstances and which ultimately go into liquidation will be afforded greater latitude by the Court provided:
- there was a reasonable prospect that the company would be able to trade out of its difficulties in a relatively short time frame; and
- the directors acted in good faith and acted honestly and responsibly in all other respects.
Whilst the majority of insolvencies arise from a legitimate business failure, and it is extremely common for the ODCE to grant restriction relief to liquidators, this guidance goes further and offers reassurance to directors of companies that continue trading during these unprecedented times.
However, that is not to say that this guidance means that directors of companies finding themselves in the zone of insolvency can rest easy. In order for the ODCE to determine that a director should not be restricted, directors must be able to demonstrate that they navigated their way through these circumstances acting honestly and responsibly and should use this time effectively to plan for the future. The importance of directors holding regular meetings where they discuss the financial position of the company and the path toward a return to profitability has never been greater. Boards that meet regularly should place an increased emphasises on keeping accurate and detailed minutes of these meetings as the first step to protecting themselves from future restriction order applications should the company ultimately fail to make it through this unprecedented period.
We at Philip Lee expect further reforms and clarifications in this area in the short term and are hopeful that these will include some of the additional measures we recommended be introduced. We would welcome any further steps that the ODCE and the Government can take to facilitate directors of companies to continue to trade through unprecedented times without having the spectre of potential restriction orders and personal liability hanging over them. Extraordinary times require extraordinary measures – the recent ODCE clarifications represent a good first step forward for directors of companies that find themselves in an extraordinarily difficult position due to the COVID-19 pandemic.