News

The protection afforded by limited liability has its own limits in the context of liquidation or administration of a company. Insolvency practitioners and the Official Receiver in a Court Winding Up have a duty to act in the interests of a company's creditors, and this extends to considering whether there are any causes of action against the directors of the company if they have misapplied property or breached their duties as directors.

In addition, Department of Enterprise, Trade and Investment (DETI) will consider whether there are sufficient grounds to bring directors disqualification proceedings.

A number of changes to the liquidation and administration regimes introduced through the Small Business, Enterprise and Employment Act 2015. These took effect from 1 October this year and will significantly increase the personal liability risks of directors.

Key Changes:

1: Compensation orders

DETI will have the power to seek a ‘Compensation Order’ from the directors i.e. directors will effectively be fined for their misconduct and ordered to pay a sum of money, either to the liquidator or the administrator of the company, to creditors, or to DETI.

The fines and the criteria to be applied in determining whether to seek a Compensation Order are yet to be decided. It may be that DETI will routinely make an application for a Compensation Order at the same time as applying for a Directors Disqualification Order. In our view this significantly raises the stakes for directors of insolvent companies.

2: Extension of time to bring disqualification proceedings

DETI now have 3 years from the date of commencement of the insolvency process to bring disqualification proceedings against a director, rather than 2 years.

We have seen a number of examples where directors have narrowly avoided disqualification proceedings due to complex issues in the insolvency not being resolved within the previous 2 year window.

DETI has also historically tended to initiate proceedings close to the 2 year limit and we expect that in future they will use the full 3 years to consider whether to bring proceedings.

3: Assignment of claims for wrongful or fraudulent trading

It has long been the case that liquidators or administrators could assign claims belonging to the insolvent company which they were not in a position to pursue, but which had a value to a willing purchaser.

However, some claims in insolvency processes attach not to the company but to the insolvency practitioner, and these have historically not been capable of being assigned.

The law is now being changed to enable these claims to be assigned to third parties. We expect this to eventually lead to a number of boutique litigation firms emerging to purchase and pursue these claims, which will increase the risks for directors of being on the receiving end of potentially costly litigation after a failed business venture.

The combined effect of the above changes will be to increase the personal liability risks of directors whose companies are experiencing financial challenges. In order to reduce these risks, we would encourage directors to seek early advice from a qualified insolvency practitioner where they are concerned about financial difficulties. Directors should also ensure that they document key decisions and retain records in order to demonstrate that they were at all times acting in the best interest of the company.

We expect to see more companies to propose Company Voluntary Arrangements (CVAs) as an alternative to liquidation or administration. Successfully implemented CVAs can be used to rescue a financially distressed business, and do not involve directors’ disqualification proceedings, or claims for wrongful trading, however it is important that advice is sought early in order to maximise the options available for financially distressed companies.