Regulations Expand Directors' Duties in Insolvency

The EU (Preventative Restructuring) Regulations 2022 (the Regulations) were signed into law on 27 July 2022. The Regulations largely focus on the examinership regime in Ireland which is already very comprehensive. However, the Regulations also include amendments to the Companies Act 2014 (the Act) in certain areas including codifying the duty of directors to have regard to creditor’s interests when facing insolvency.

Changes to the Act

A new section 224A of the Act has been introduced which requires directors of companies that are insolvent or likely to become insolvent (being unable to pay their debts within the meaning of the Act) to have regard to:

• the interests of creditors;
• the need to take steps to avoid insolvency; and
• the need to avoid conduct which is deliberate or grossly negligent that threatens the viability of the business of the company. 

This duty is owed to the company and the company alone and directors do not have a duty directly to the creditors of a company. This new section is significant in expanding the responsibilities of directors when a company is facing insolvency. 

In addition, section 228 of the Act is amended by the Regulations with the insertion of a new fiduciary duty for directors at paragraph (i) of the section requiring that:

'In addition to the duties under section 224A (directors to have regard to certain matters where company is, or is likely to be, unable to pay its debts), [a director of a company shall] have regard to the interests of its creditors where the directors become aware of the company’s insolvency.'

This fiduciary duty was previously only recognised by the courts at common law and this is the first legislative grounding of this duty. This duty will be enforceable in the same way as any other fiduciary duty and the consequences of a breach set out in section 227 of the Act will also apply to the new section 228(i).

Commentary

These legislative changes place a more positive obligation on directors to take action when a company is or may be likely to become insolvent and to prevent the situation from worsening and damaging the viability of the company. 

The inclusion of this obligation to have regard to creditor's interests in legislation will avoid any ambiguity for directors and will, along with the other measures included in the Regulations, encourage early action to be taken by directors to avoid insolvency of companies.

Article contributed by Emily Harrington. For more information please get in touch with Shaun O'Shea.