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