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Key Points from the Corporate Enforcement Authority’s Recent Information Note on the European Union (Preventive Restructuring) Regulations 2022

In July 2022, the European Union (Preventive Restructuring) Regulations 2022 (the “Regulations”) were transposed into Irish law. The primary focus of the Regulations is to ensure that there are restructuring frameworks in place to assist viable companies that are in financial difficulty.  The Regulations have amended the Companies Act 2014 (the “Companies Act”) and have placed new statutory duties on company directors. A recent information note published by the Corporate Enforcement Authority (the “CEA”) provides welcome guidance regarding the scope of these new directors’ duties.

"Financial Difficulties"

Financial difficulties arise where a company is or may not be able to meet its financial commitments. The CEA has set out a number of indicators of financial difficulty which include, inter alia:

  • •  poor liquidity ratios;
  • •  breaches of the terms of loan agreements; and/ or
  • •  unsustainable bad debt levels;

“Inability to pay debts”

As directors will be aware, the Companies Act prescribes that a company is unable to pay its debts if:

  • •  the company being unable to pay its debts as they fall due;
  • •  the value of the assets of the company is less than the amount of its liabilities (taking into account its contingent and prospective     liabilities);
  • •  the company has failed to pay a creditor owed more than €50,000 following a demand for payment (in writing) on the company;
  • •  the company has failed to pay two or more creditors owed more than €50,000 following a demand for payment (in writing) on the company
  • •  any judgement or order of any court in favour of a creditor is returned unsatisfied in whole or in part; or
  • •  if it is proved to the satisfaction of a court that the company is unable to pay its debts

The Regulations insert a new section 224A into the Companies Act which provides that if a company director “believes, or has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts”, the company’s directors “shall have regard to –

 

  • • the interests of the creditors,
  • • the need to take steps to avoid insolvency, and
  • • the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company.”

“Suggested steps to be taken by directors"

The Regulations also insert a new provision into the Companies Act, Section 271A, providing that company directors may have regard to “early warning tools” which may alert them to the “likelihood that the company concerned will be unable to pay its debts”. Conveniently, the CEA’s recent information note in relation to the Regulations provides a non-exhaustive list of ‘Indicators of Financial Difficulties’. These indicators include, for instance:

 

  • • declining sales;
  • • depleted cash-reserves;
  • • unsustainable bad debt levels;
  • • late filing of Revenue returns to delay discharging debt;
  • • poor liquidity ratios; and/ or
  • • breaches of the terms of loan agreements.

In order to maintain a clear view of a company’s financial health and the potential existence of any of the listed indicators of financial difficulty, the CEA information note advises directors to adopt the following key measures.

Maintain adequate accounting records

Company directors are already under a continuous statutory duty to maintain adequate accounting records pursuant to Section 281 of the Companies Act. However, the CEA information note correctly highlights that directors in default of this duty will be in a worse position to gauge whether the company is able to meet its debts as they fall due and, as such, whether they should consider restructuring options to avoid insolvency.

Preparation of management accounts/budgets/cashflow projections etc.

The CEA recommend that, in addition to maintaining adequate accounting records, directors should also prepare regular management accounts, budget forecasts and cashflow projections. These will provide directors with a more current picture of whether the company is generating cash, the value of its assets or whether it may be facing into an insolvency scenario.

Importance for directors

Directors found to be in default of their statutory duties may be held personally liable for some (or all) of the company’s debts and may also be restricted or disqualified from acting as a company director for a period of time. In more extreme cases of duty breaches, directors may be subject to criminal sanctions.

 

In circumstances where directors have actual knowledge of the company’s insolvency or have reasonable cause to believe that the company is or is likely to face financial difficulty or be unable to pay its debts, the CEA advise that such directors should consider taking professional advice at the earliest appropriate opportunity.

 

Contact the Authors

Partner, Head of Banking & Finance 

 

Trainee Solicitor

 

 

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