Directors' Duties: New Statutory Duties To Have Regard To The Interests Of Creditors

• Published date: 12 August 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Corporate Governance, Insolvency/Bankruptcy
• Law Firm: Arthur Cox
• Author: Dr. Thomas Courtney, Suzanne Kearney and D'ibhí O'Leary

The European Union (Preventive Restructuring) Regulations 2022 have amended the Companies Act 2014 so as to require for the first time in statute that directors of companies unable, or likely to be unable, to pay their debts, must have regard to the interests of creditors.

The European Union (Preventive Restructuring) Regulations 2022 (S.I. No. 380/2022) (the "2022 Regulations"), introduced on 27 July 2022 for the purpose of giving effect to Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 (the "Directive") on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (Directive on restructuring and insolvency), have amended the Companies Act 2014 (the "Act") so as to require for the first time in statute that directors of companies unable, or likely to be unable, to pay their debts, must have regard to the interests of creditors.

Background to directors' duties at common law in an insolvency situation

Under Irish law, a director's primary duties are owed to the company. This principle had been well established by common law and is codified under s 227(1) of the Act which states that "a director of a company shall owe the duties set out in section 228 to the company (and the company alone)". These fiduciary duties included a duty to act in good faith, to act honestly and responsibly, to avoid conflicts of interest and to exercise care, skill and diligence in conducting the affairs of the company.

The courts had however additionally held in a number of instances that when the directors of a company become aware that it is, or is likely to be, unable to pay its debts, those directors also owe a duty of care to the company's creditors. Notably, in Re Frederick Inns Ltd¹, the Supreme Court acknowledged the existence of a duty to have regard to the interests of creditors where a company was insolvent. Subsequent case law has held that the directors of an insolvent company have a duty to put the company into creditors' voluntary liquidation² and preserve the company's assets so that they can be applied in discharging its liabilities³ .

There has been no express authority in Irish case law as to whether these duties are owed directly to creditors or are merely part of the duties that the director owes to the company on insolvency. The better view is that any such...