Directors and officers

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Directors can be exposed to liability on a number of fronts. Primarily, directors may be exposed to liability for breaching their general duties of care towards the company. Directors may also be exposed to wrongful trading liability where they knew, or ought to have known, that there was no reasonable prospect the company could have avoided being dissolved owing to its insolvency. In this instance, directors may be held liable to make a contribution to the company’s assets at the discretion of the court. More grievously, if there is evidence that the business has been carried on with an intent to defraud creditors, then any individual knowingly party to the carrying on of business in that matter will be exposed to fraudulent trading liability. This liability constitutes a criminal offence and exposes those individuals to a fine of up to €232,937.34, imprisonment of up to five years, or both.

Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

There are a number of fiscal debts for which company directors or officers are personally liable. Typical examples are claims in respect of unpaid value added tax, social security contributions and unpaid wages.

Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

Directors are not likely to be cited as defendants in the context of any insolvency or reorganisation proceedings. In the event that directors or officers are sued for fraudulent trading, the obvious defence open to those directors or officers would be that they had no intention to act fraudulently and that they had acted honestly, in good faith and the best interests of the company and of its creditors. In an action for wrongful trading, it would be open to any directors defending such a claim to show the court that despite the insolvency of the company, he or she took all reasonable steps to mitigate the losses of the company creditors.

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

Directors’ duties do shift to prioritise creditors’ interests in such a situation. Directors have a duty to react to a situation where the company is insolvent or imminently likely to become insolvent; they must consider the future of the company, the likely prejudice that might be caused to the general body of creditors, and more importantly to decide whether the company should be dissolved and wound up, or alternatively whether recourse to a company recovery procedure should be commenced.

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

Once a company is dissolved and put into liquidation, all powers of directors cease, and the appointed liquidator exercises the duties and powers envisaged in the law. Similarly, if a special controller is appointed in the context of a company recovery procedure, the directors’ powers are suspended until such time as the court reviews the future of the company at the end of the statutory moratorium. Pending the hearing of a winding-up application, a court may also consider appointing a provisional administrator, in which case the court will determine its function and powers. The directors can continue to hold office and exercise their powers unless the court restricts or suspends their powers and grants the provisional administrator specific powers and functions in its order.