Directors' Duties To Consider Creditors ' Navigating Recent Developments

• Published date: 22 February 2023
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Matheson
• Author: Mr Brendan Colgan, Kevin Gahan, Julie Murphy-O'Connor, Tony O'Grady, Irene Lynch Fannon and Róisín Peart

The Irish courts have long recognised the principle that directors of companies that are insolvent must have regard to the interests of the creditors of the company as a matter of Common Law.

The European Union (Preventive Restructuring) RegulationsOpens in new window 2022 (the "Regulations"), which were signed into law last year, have reinforced and refined this principle in certain respects.

The Regulations have, amongst other things, inserted a new section 224A into the Companies Act 2014 (the "Act")¹, which provides that a director who believes, or has reasonable cause to believe that a company is, or is likely to be unable to pay its debts², must have regard to:

(a) the interests of the creditors;³

(b) the need to take steps to avoid insolvency; and

(c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company.

These duties are expressly stated to be owed to the company (and the company alone) as opposed to the creditors. This means that creditors do not have a right of action against the directors for breach of the duties. Rather it is the company, potentially acting through its liquidator, that can hold the directors to account for any loss or damage resulting from a breach.

Directors' duties under section 224A are in addition to the fiduciary duties set out in section 228(1) of the Act, to which the Regulations have now also inserted an additional duty for directors to have regard to the interests of the company's creditors when they become aware of the company's insolvency.

Early Warning Tools

In practical terms, it is often difficult to identify at precisely what point a company is or is likely to become insolvent. The Regulations provide, by way of a new section 271A of the Act, that directors may have regard to certain early warning tools to alert them to circumstances that may give rise to a future insolvency.

Following a public consultation period, the Corporate Enforcement Authority ("CEA") published an information note on the Regulations, early warning tools and restructuring frameworksOpens in new window on 3 January 2023 (the "Information Note"), which provides a non-exhaustive list of indicators of actual, or potentially approaching, financial difficulties⁴.

The Information Note comments that "...having regard to the challenging environment within which companies are currently operating - in which increasing interest rates, significant currency fluctuations, supply chain...