ODCE welcomes the initiative of IBEC to address the current and ongoing problem of businesses under pressure.
The Office plays a significant role in insolvency, in that every time a company goes into insolvent liquidation, a report must be sent within six months by the liquidator to the Office. This report summarises the liquidation process and also gives an indication by the liquidator as to whether the directors acted honestly and responsibly in the period leading up to the insolvency.
Based on this report, and any other information that the Office may be in possession of, we will either require the liquidator to take High Court proceedings against some or all of the directors to ascertain if they should be restricted, or relieve them of that obligation.
If a director is restricted, then for a five year period, if they wish to be a director of any other company, it must have a certain level of minimum paid in share capital. For private companies this amounts to €63,487, and €317,435 for public companies. This is a civil court order, not a criminal conviction, and at the end of the five year period the directors are removed from the register of restricted directors.
When considering whether directors are to be restricted or not, as mentioned above the key issues under the law are whether they behaved both honestly and responsibly. In practice the court will consider issues such as:
- · has the company run up significant debts;
· has the company been trading while insolvent;
· does the company owe significant sums to the Revenue;
· has the company been paying certain creditors ahead of those with preferential rights (for example paying directors rather than Revenue, staff etc.)
· has failure to keep proper books of account contributed to the insolvency;
· has a combination of these issues occurred.
Historically, the Office relieved liquidators of their obligation to take such proceedings in about 75% of cases. Since the economic downturn, there has been a significant rise in insolvencies; the Office has seen the number of reports it receives more than treble. Nevertheless, the proportion of cases where liquidators have been relieved of their obligation to take restriction proceedings has increased to over 90%. This reflects the position that unfortunately many “good” companies, that were properly run by their directors, are becoming insolvent.
Consideration of issues such as restriction is not based on hindsight. The courts do not attempt to second guess directors as to the conduct of their business, and as to what other business decisions, if taken, may have led to the company surviving. A common sense and pragmatic approach is typical, and only where issues such as or similar to those indicated above are prevalent, would restriction be considered.
Directors should note that where a liquidator becomes aware that any criminal offences have taken place under company law, then he has an obligation to report that to the Office also. Such offences that may be relevant in this context include:
- · failure to keep proper books of account;
· illegal directors’ loans;
· fraudulent trading.
Our main advice to companies would be to address financial issues early. Regularly we see situations where significant debts have been allowed to build up with debtors which leads to businesses themselves coming under pressure. Directors who do not deal quickly and authoritatively with business difficulties may ultimately be considered not to have acted responsibly. The worst thing is to do nothing . Debtors should be pursued vigorously, credit limits should not be allowed to be exceeded. Where appropriate and possible payments in advance should be sought.
If your business is in difficulty, then it may be worthwhile approaching creditors to see if a mutually agreeable position can be achieved. There are also formal legal arrangements allowed for under company law by which a company can officially have its debts restructured, however this is an expensive process..
In summary, the ODCE’s advice is:
- · address and try and resolve problems early;
· actively manage your cash;
· if you are in trouble, talk to your creditors;
· act honestly and responsibly;
· do not break the law!
If you have any questions on company law, there is plenty of guidance available at http://www.odce.ie. Check out our “Company Law and You” section, and our Frequently Asked Questions. If you want to find out what the Companies Acts say you can call or email the Office. Lo-call 1890315015, or email email@example.com. All Companies legislation can also be accessed on our website.
ODCE always recommends that persons get their own independent legal advice from a commercial law practitioner where appropriate.