Restructuring - Recent Irish Developments
Many companies in Ireland and further afield are facing difficult and uncertain times over the short to medium term. This will not come as a surprise to the directors of many companies who will understand only too well the potential effects of the various prevailing economic headwinds.
With a noted increase in the number of recent Irish insolvencies (albeit from an historically low basis)1, it is particularly important for directors to keep abreast of their obligations as directors of Irish companies and to be aware of relevant legal developments.
The second half of 2022 has brought about a number of important clarifications regarding the obligations owed by directors of Irish companies pursuant to the Companies Act 2014 (as amended) (the Act). As we approach the end of 2022, we look back on a number of recent developments which have taken place over the latter half of this year.
Corporate Enforcement Authority
In early July 2022, the Corporate Enforcement Authority (CEA) was established as an independent body which performs essentially the same role and functions (with modifications) as its predecessor, the Office of the Director of Corporate Enforcement (ODCE). The functions of the CEA as set out in the Act include: (i) assessing the behaviour and conduct of the directors of insolvent companies; (ii) investigating instances of suspected breaches of company law; and (iii) taking appropriate action in response to identified breaches of the Act.
In order to carry out its functions, the CEA is conferred with certain investigative and enforcement powers. While the powers are largely similar to the powers that were previously conferred upon the ODCE, there has been structural reform which is designed to increase the CEA’s effectiveness.
Statutory Obligation to Have Regard to the Interests of Creditors
At the end of July 2022, the European Union (Preventive Restructuring) Regulations 2022 (the Regulations) were signed into law. The Regulations provide for the transposition of the mandatory articles of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measure to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132.
The Regulations introduced a number of amendments to the Act, including the introduction of a new section 224A of the Act, pursuant to which directors are required to have regard to the interests of creditors where the directors believe, or have 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) of the Act.
While the Irish courts had previously recognised a common law duty to have regard to the interests of creditors of an insolvent company or a company that is close to insolvency, the new section 224A appears to expand the circumstances in which this duty arises. The reference in the new section 224A to being unable to pay its debts “within the meaning of section 509(3) of the Act”, means that the duty to have regard to the interests of creditors arises, amongst other scenarios, when a company is balance sheet insolvent. By contrast, the Company Law Reform Group’s suggestion to codify this duty contained in the Report on the Protection of Employees and Unsecured Creditors, refers to an inability to pay a company’s debts absent a reference to s 509 (3) of the Act.
It remains to be seen how the courts will interpret what it means for directors to “have regard to the interests of creditors”. Irrespective of how the courts interpret this duty, Section 224A provides that this duty is owed to the company and the company alone and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.
Directors Held Liable for Fraud of the Company
In late October, the decision in Powers vs Greymountain Management Ltd (In Liquidation)2 was delivered and attracted significant attention for the fact that, for the first time ever, an Irish court found the directors and shadow directors of a company to be liable for a fraud committed by a company.
Greymountain was an Irish company which was set up and owned by two shadow directors, who used the company to perpetrate a fraud on investors. The investors in Greymountain understood that they were trading binary options. However, the options were never purchased and the funds were diverted to the shadow directors.
The Plaintiff suffered losses arising out of the fraud and, instead of seeking an order as against the company, he sought orders against the two directors and the two shadow directors.
The court found that the sole purpose of the company was as an instrument of fraud and that the moral responsibility rested with the shadow directors. The court also recognised the fundamental principle that a company has a separate legal personality except in exceptional circumstances. Notwithstanding the foregoing, the court found that, amongst other circumstances, where it was established by way of plenary hearing that directors had syphoned off large amounts of money out of the company, and where the interests of justice demanded it, the corporate veil could be pierced. The court said that there was no reason to distinguish between “shadow directors” and “directors”. On this basis the court held the shadow directors personally liable for the debts of the company.
The court also found that the directors of the company had effectively “handed over the keys” of the company to the shadow directors and had let them run the company without effective oversight. The directors were not actively involved with the fraud and were not in fact even aware of the fraud. Despite this, the court held that the complete abdication by the directors of their basic duties facilitated the fraud and that in these circumstances they should also be made personally liable.
While obviously an extreme case, the decision in Powers serves to reinforce the seriousness of the obligations and responsibilities that one undertakes when accepting a role as a director and the risks associated with not taking these responsibilities seriously.
Interim Period Extended for Certain Measures but Not for Others
In December, the “Interim Period”, during which certain amendments to the Act made pursuant to the Companies (Miscellaneous Provisions)(Covid) Act 2020 were effective, was extended until 31 December 2023 as regards the increased threshold to EUR50,000 at which a company is unable to pay its debts and as regards the holding of annual general meetings and general meetings by electronic means.
The Interim Period was not extended, and will expire after 31 December 2022, as regards the amendments that were made to the Act regarding remote execution of documents and the extended period for examinership (for more on this see our previous article Examinership in exceptional times.
Updated Disqualification and Restrictions
On foot of the establishment of the CEA, December also saw the publication of SI No 646 /2022 - Companies Act 2014 (Disqualification and Restriction Undertakings) Regulations 2022. These have the effect of updating a replacing the disqualification and restriction undertakings that were in force under SI No 2022/2015.
1 A recent report published by Deloitte suggests a 29% increase in insolvencies during 2022 to date versus 2021.
2  IEHC 599.