New Statutory Directors Duty To Have Regard To The Interests Of Creditors

• Published date: 26 October 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Maples Group
• Author: Mr Colm Rafferty, Morgan Pierse, Jordan O'Brien, William Darmody, Robin McDonnell and Karole Cuddihy

The European Union (Preventive Restructuring) Regulations 2022 (the "2022 Regulations") have amended the Companies Act 2014 (the "Companies Act") in a number of respects, including by introducing a new statutory duty requiring directors of a company that is (or is likely to be) insolvent to have regard to the interests of creditors.

The 2022 Regulations transpose the EU Preventive Restructuring Directive (2019/1023) (the "Directive") into Irish law. The Directive has the principal objective of ensuring that Member States have minimum rules in place so that viable enterprises that are in financial difficulties have access to effective national preventive restructuring frameworks that can enable them to continue to operate.

Directors' Duties to Creditors

Prior to the 2022 Regulations, a director's duty to creditors in the period approaching insolvency, often referred to as 'the twilight zone', was a common law duty only and was not provided for in the Companies Act or in any statute. Irish court judgments never clarified whether the duty was owed to the company, which is the usual position in regards to directors' duties, or to the creditors.

The 2022 Regulations have amended the Companies Act to provide that directors now have a statutory duty to have regard to the interests of creditors where there is a likelihood of insolvency, as opposed to only after the company has become insolvent. It inserts the following new section into the Companies Act as follows:

"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 section 509(3)), shall have regard to -

1. The interests of the creditors;
2. The need to take steps to avoid insolvency; and
3. The need to avoid deliberate or grossly negligence conduct that threatens the viability of the business of the company".

This duty to creditors has also been included in the list of fiduciary duties owed by a director to the company in the Companies Act.

The 2022 Regulations clarify that the duty to have regard to creditors is owed by the directors to the company only and will be enforceable in the same way as any other fiduciary duty owed to a company by its director. This means that creditors will have no direct right of action against a director where there is a breach. In practice, a breach will most likely be enforced by a company acting through its liquidator.

Test for Assessing When a Company is Unable to...