Analysis: Irresponsible directors beware - big changes are coming in how our companies are policed
In our growing economy, the volume of companies petitioning for examinership or being placed in liquidation has reduced considerably. However, with the uncertainty that has come with the Trump presidency and Brexit, it would be negligent of companies not to prepare for challenges.
What happens if your company is hit by a financial hammer blow as result of trading difficulties? The first thing to remember is not to let the rot set in. Discuss the matter with your financial adviser and decide on the best way forward. Directors of companies in difficulty usually have one of two options.
Option 1: If they feel the financial state of the company is reasonable and it can trade out of its difficulties, then it can apply to the courts to appoint an examiner. This procedure will allow 100 days to put a scheme in place for approval by the court and will be beneficial to both employees and creditors alike.
Option 2: If they feel that the company cannot trade out of its difficulties, they should place the company in voluntary liquidation by a process known as a creditors' voluntary winding-up.
There are three methods through which a company can go into liquidation - by compulsory liquidation, where the company is wound up by the court; by creditors' voluntary liquidation, where the company is wound up at a meeting of members and creditors; and by members' voluntary liquidation.
In my experience, the causes for the demise of a company can range from sheer bad luck to directors making a pig's breakfast of things.
I have encountered directors who have allowed their company be under-capitalised from the outset, with no proper books and records being kept and no annual returns filed with the Companies Registration Office (CRO). As a result the directors end up in breach of all statutory rules and the company is dissolved by the CRO.
In some cases, the demise of a company can be deliberate on the part of the directors, when they tinker with company funds.
I have also seen directors seeking to get rid of their financial difficulties by deciding to form another company and move on, leaving the creditors to go whistle.
Under Irish company law there are no set qualifications required to become a director of a company.
I find there is a very light touch approach by some directors to their statutory obligations as officers of a company. When I discuss matters with the directors of a company that has been placed in liquidation they seem to lack basic knowledge of company law, and when I advise them that whether or not they are executive or non-executive directors, they have collective responsibility as directors of the company, they are surprised. They seem to be interested in their rights and entitlements, but not their responsibilities and obligations.
Over the years, I have encountered many problems in the management of companies after they have been placed in liquidation. These include directors being either too light-touch or too gung ho. I have also encountered failures to keep proper books and records, which can lead to charges of reckless trading, deliberate under-declaration and failure to pay taxes, and monies due to the Revenue for VAT and PAYE/PRSI being used to fund the company.
Company directors should realise there are big changes ahead, with the Office of the Director of Corporate Enforcement (ODCE) and the CRO set to become much more severe in how they police company matters. The Companies Act 2014 has sufficient powers to make directors personally responsible for a company's debts if it appears that the directors were knowingly carrying on the business in a reckless manner, with the overall intent to defraud creditors.
In 2016, 3,664 persons were disqualified and 961 persons were restricted for acting as directors of a company. By my estimate there are thousands of company directors facing disqualification and being literally put out of business by the ODCE if their affairs are not in order and their companies’ annual returns are not filed on time.
PJ Lynch is an experienced insolvency practitioner and owner of PJ Lynch & Co