The impact of Covid-19 and insolvency-related functions of the ODCE has been saved
The impact of Covid-19 and insolvency-related functions of the ODCE
The Office of the Director of Corporate Enforcement (ODCE) recently published a public statement entitled, ‘Covid-19 and the insolvency-related functions of the ODCE’. The document contains a welcome message of comfort for directors of companies, where the financial impact of Covid-19 has been so severe, that their Companies are now insolvent or are close to being insolvent.
Under current legislation where a company enters insolvent liquidation, the liquidator is obliged to prepare a report to the ODCE which opines on the honest and responsible behaviour of the company’s directors. A negative report will mean the directors will be faced with either the voluntary acceptance of a restriction order or defending a restriction application in the High Court. A restriction order prevents a person from acting as a director of a company for a period of up to 5 years, unless that company has a minimum paid up share capital of €50,000 (€100,000 for a plc).
One of the core considerations within the report is, an assessment of when the company became unable to pay its debts as they fall due, which is an important point in time from which the actions of the directors will be closely monitored (in hindsight) by the liquidator, in light of the fact that it is the point in time that the company is deemed to have become insolvent.
Courts willingness to afford “some” latitude
In its public statement the ODCE has specifically addressed, amongst other matters, the question of continuing to trade while insolvent, whereby they say:
“Short timeframe” and “reasonable prospect for survival”
Within the above statement it is important to focus on the words ‘short timeframe’ and ‘reasonable prospect’. These words have been carefully chosen by the ODCE and they demonstrate that directors will still need to exercise due care for the company’s creditors where a company is trading for any period of time, particularly a time period outside of a ‘short timeframe’, which in itself has not been defined. In relation to ‘reasonable prospect’, the statement makes reference to ‘objectively verifiable evidence’, ‘reasonable assessments’ and ‘good faith’. In short, a decision to continue to trade while insolvent should be taken only after a thorough assessment of the company’s prospect for survival, which assessment should be based on reasonable assumptions and expectations.
Where directors in such circumstances have decided to continue to trade, it is recommended that they closely monitor the company’s performance against budget, as well as formally recording their assessment of the Company’s performance at that time. A failure to carefully track the company’s performance in a scenario where the liability to creditors continues to increase could still lead to a negative outcome for the directors, despite the ODCE’s recent publication.
Welcome news but not a “free-pass”
While the public statement from the ODCE is clearly welcomed and will provide some element of comfort to the directors of companies facing financial difficulty at this time, particularly where the difficulty is directly associated with the current pandemic, directors of such companies still need to act with due consideration for the company’s creditors. They should avoid the increase in liability to creditors over anything other than a short timeframe and should only do so where they have made a reasonable assessment that those liabilities will be repaid in full once the business has returned to a stronger financial position. Directors should not consider the ODCE’s statement as a ‘free pass’ to utilise supplier credit lines without having a reasonable basis to demonstrate the Company’s ability to repay that debt in the future, otherwise they could still remain at risk of allegations of fraudulent and reckless trading by creditors, which apart from issues such as restriction orders, could lead to personal liablity.
In conclusion, the public statement from the ODCE, specifically mentions the importance of getting professional advice where an insolvency event has occurred or is on the horizon. In our experience the sooner that professional advice is sought from an appropriately experienced insolvency specialist the greater the number of recovery options for the struggling company.