ODCE statement on COVID-19 related insolvency and restriction orders

Published 24 junio 2020

Introduction

The Office of the Director of Corporate Enforcement (“ODCE”) has released a statement to alleviate the concerns of directors of Irish companies about the risk of having a declaration of restriction made against them as a result of a COVID-19 related company insolvency.

Restriction orders

It is when things go wrong for a company that the behaviour of its directors will come under particular scrutiny. Under the Companies Act 2014, liquidators of insolvent companies are obliged to report on directors’ conduct and to bring restriction proceedings against directors in the High Court unless relieved of their obligation to do so by the ODCE.

Unless it is satisfied that their actions were honest and responsible, the High Court must make a restriction order against such directors which prevents them from acting as director or secretary, or taking part in the formation or promotion of a company, for five years, except where that company meets certain capital requirements.

ODCE statement

In its statement, the ODCE sets out some key considerations that are relevant to its determination as to whether directors of companies that have become insolvent as a consequence of COVID-19 will be able to show that they have acted honestly and responsibly and, if they have not, whether they should be offered restriction undertakings by the ODCE or otherwise face restriction applications before the High Court.

Importantly, the statement highlights that the ODCE generally relieves liquidators of their obligation to bring restriction proceedings in any case where the available evidence clearly shows that a company director has acted honestly and responsibly in the conduct of a company’s affairs and that the ODCE grants such relief in the large majority of cases.

The ODCE states that it would generally not consider directors to have acted dishonestly or irresponsibly in circumstances where the company has become insolvent as a consequence of events outside the directors’ control and that it is the actions taken, or not taken, by the directors in response to financial difficulties being faced by the company that will inform the assessment as to whether directors should face restriction.

The statement also mentions that Courts have demonstrated a willingness to afford some latitude for a continuation of trading for a short period in certain circumstances but that this is generally dependent on there having been a reasonable prospect that the company would be in a position to trade out of its troubles in a short period and the directors having acted in good faith and honestly and responsibly.

The ODCE also states that it will have due regard to the impacts of COVID-19 when reviewing liquidators’ reports on companies that enter into insolvent liquidation during the pandemic. The ODCE will have regard to matters including:

• the adequacy of the directors’ processes and procedures for monitoring the company’s financial position;
• whether, and if so at what point, directors sought professional advice regarding insolvency;
• the basis upon which the directors formed the view that the company would be able to trade out of its difficulties within a reasonable timeframe;
• the length of time that trading continued after it became (or should have become) apparent that the company was insolvent;
• the extent to which the company’s financial position continued to worsen;
• in cases where there are material tax liabilities, whether such liabilities arose before or during the pandemic and how the company engaged with the Revenue Commissioners; and
• the steps taken to reduce costs and/or restructure the business.

The statement also notes the Revenue Commissioners’ position that a declaration made as part of an application for the COVID-19 Temporary Wage Subsidy Scheme is not a declaration of insolvency.

The ODCE says that it is unlikely that it would consider that company directors should be restricted where the directors’ decisions and judgements were:

• made on the basis of objectively verifiable evidence;
• based on reasonable assessments and assumptions in the circumstances; and
• made in good faith and the directors otherwise acted honestly and responsibly.

Comment

The ODCE statement provides useful guidance, and perhaps a level of comfort, to company directors during this challenging time. As restricted directors’ names are entered on a searchable register maintained by the Companies Registration Office, a restriction order may have a significant reputational impact for certain directors.

As pointed out in the ODCE statement, only a small minority of directors of insolvent companies face restriction orders as most company insolvencies arise from a legitimate business failure. Broadly speaking, to avoid the imposition of a restriction, a director must be able to show that he or she acted honestly and responsibly in relation to the conduct of the affairs of the company.

For more information or assistance please contact John Darmody, Senior Associate or another member of our Dublin Corporate and Commercial team.