Creditors are looking at every option available to them in order to force companies to pay their debts and this is a situation that is facing a large number of companies at the moment. It is imperative that all Directors are aware of their duties pursuant to the Companies Act. The most basic duty of Directors is that they act in the best interests of the Company. Under Company Law, it is a duty of Directors to wind up an insolvent company. An insolvent company is a company that cannot pay its debts as they fall due. It is a minimum requirement for Directors to have current financial information including management accounts so they are aware of the financial position of the company. This information will assist the Directors regarding the going concern of the company and whether the company is solvent or not.

A creditor may go to court and apply for a judgement to be registered against the company in relation to the debt. If they are still unsuccessful in receiving payment, another option is that a creditor may apply to the High Court to have a company wound up if that company is insolvent. However, this is a very costly exercise and will not be entered into lightly by the creditor.

Sec 213 of Companies Act 1963 sets out the circumstances in which a company may be wound up by the court:

(a)              Co. has by special resolution resolved to wind up Co. by Court

(b)              Default is made in delivering the statutory report to the registrar or in holding the statutory meeting

(c)      Co. does not commence its business within a year from incorporation or a whole year

(d)          Number of members is reduced below minimum

(e)          Company unable to pay debts

(f)          Court is of opinion that Co. should be wound up

(g)          Company’s affairs are oppressive to any member or in disregard to them

Sec 214 of Companies Act 1963 set out the circumstances in which a company deemed to be unable to pay its debts. 

“214. — A company shall be deemed to be unable to pay its debts—

(a)      If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding €1,269.74 then due, has served on the company, by leaving it at the registered office of the company, a demand in writing requiring the company to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor; or

(b)      If execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; or

(c)      If it is proved to the satisfaction of the court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company.”

The 21 day demand letters as set out in Sec 214 is the most common way to prove that a company is unable to pay its debts. The amount of the debt must be undisputed by the company, hand delivered at the registered office of the company and the demand for payment must be bona fide.

The Court will hear the case and decide pursuant to Sec 213 Companies Act 1963 whether or not to grant the order to wind up the Company and to appoint a liquidator.

Directors of companies facing this situation will need to review the financial position of the company and decide if there is a viable way for the company to continue in business. This can include seeking fresh investment or approaching the bank for capital, establishing new products, entering new markets or discontinuing an obsolete product or service.

If there is no option but to cease trading, the directors should appoint a liquidator and put the company into Creditors Voluntary Liquidation. The Directors must get the approval of the shareholders to wind up the company and to appoint a liquidator. The board will then prepare a statement of affairs and a Creditors meeting will be called.

Once a Liquidator has been appointed, there is a statutory duty on the liquidator to report to the Office of Director of Corporate Enforcement on the reasons why the company went into liquidation and the role the Directors played in the company. The liquidator must decide and advise the ODCE whether in their opinion some or all the Directors should go to the High Court to be restricted from acting as Directors. The Directors may also face more serious charges including reckless trading and fraudulent trading.

The main defence of Directors that go before the court for restriction is that the Director proved that he acted “honestly & responsibly”. The test to determine whether a Director acted honestly & responsibly has been set down in a number of cases and includes the following:

• The extent to which the Director has or has not complied with any obligation imposed on him by the Companies Acts;
• The extent to which his conduct could be regarded as so incompetent as to amount to irresponsibility;
• The extent of the Director’s responsibility for the insolvency of the company;
• The extent of the Director’s responsibility for the net deficiency in the assets of the company disclosed at the date of the winding up or thereafter
• The extent to which the Director, in his conduct of the affairs of the company has displayed a lack of commercial probity or want of proper standards

The Court will decide, based on the above points, whether that Director acted honestly & responsibly and in the best interests of the Company. We have recently seen the High Court restrict Joe Burke, the Chairman of Dublin Port Company, from acting as a Director due to his company, JH Burke Sons Builders Limited, going into liquidation. The judge found that because accounts were not prepared & audited this meant financial decisions were being made by him “more in hope” than knowledge.

In the Dev Oil & Gas Limited case, Vivian Devlin was found personally liable for 68% of the debts of the Company that went into liquidation in 2002. The Liquidator sought orders:

- A declaration that the Co. did not keep proper books of account
- Directing Vivian Devlin to be held personally liable for the debts & other liabilities
- A disqualification order against Vivian Devlin

The Court found that the Company did not keep proper books of accounts, which led to the liquidator only been able to recover 1.85% of the estimated debt and in a typical case the liquidator would expect to recover 70% of the debts. The Court found Vivian Devlin personally liable for €425,864 and was also disqualified from acting as a Director for a period of 8 years.

I would encourage all Directors to be aware of their duties as Directors and to ensure that they and their companies comply with all aspects of Company Law. Every Director should observe the following points;

• Keep Proper Books & Records
• Be aware of the financial position of the Company
• Hold regular board meetings and record the decisions of the Directors & Shareholders in the minutes of the meeting
• Obtain legal & financial advice.