ODCE Guidance For Companies Facing Insolvency due to COVID-19

The ODCE issued a guidance document “COVID-19 and the insolvency-related functions of the ODCE” providing some helpful and welcome guidance to directors of companies impacted by the COVID-19 pandemic.

Directors of companies that go into liquidation face restriction proceedings unless they can demonstrate that they have acted “honestly and responsibly”. Only a small minority of directors of insolvent companies face restriction proceedings.

The ODCE would generally not consider directors to have acted dishonestly or irresponsibly in circumstances where the company has become insolvent as a consequence of events largely, and genuinely outside the directors’ control.

Recording Minutes of Meetings

As Chartered Secretaries we always advise companies to document advice received and key decisions taken so that the directors may demonstrate they have acted “honestly and responsibly” and “in the best interests” of the company. Recording minutes and resolutions of directors and members is an important step particularly when companies are facing insolvency and deciding to continue to trade and the basis for these decisions.

Some of the key messages from the guidance include:-

  • Whilst continuing to trade while insolvent would generally give rise to a significant risk that the directors concerned could face restriction proceedings (and possibly other consequences depending upon the relevant facts and circumstances), the ODCE notes that the Courts have demonstrated a willingness to afford some latitude for a continuation of trading for a short period in certain circumstances. The extension of any such latitude by the Courts would generally be contingent upon
    • (i) there having been a reasonable prospect that the company would be able to trade out of its difficulties in a relatively short timeframe; and
    • (ii) the directors having acted in good faith and having acted honestly and responsibly in all other respects.
  • In the case of those companies that do enter insolvent liquidation over the coming months, the ODCE will have due regard to the impacts of the pandemic as it carries out its functions of examining, and adjudicating upon, liquidators’ reports. In that context, issues that the ODCE will expect liquidators to have examined, and which the ODCE will itself have regard to, will include:
  1. a) the adequacy of the directors’ processes and procedures for monitoring the company’s financial position on an ongoing basis;
  2. b) whether, and if so at what point, directors sought professional advice relating to the insolvency/impending insolvency;
  3. c) the basis upon which the company’s directors formed the view that the company would be able to trade out of its difficulties within a reasonable timeframe (which might include, for example, the potential impact of access to Government grants, loans and other supports, both already announced and in prospect);
  4. d) the length of time that trading continued after it had become apparent, or should have been apparent, that the company was insolvent;
  5. e) the extent to which the company’s financial position continued to deteriorate, as well as the nature of any additional liabilities that accrued, during the period during which the directors knew, or ought to have known, that the company was insolvent;
  6. f) in cases where there are material tax liabilities involved, the extent to which such liabilities arose prior to, or during, the pandemic and, where they arose during the pandemic period, the extent to which the company availed of, and complied with, the Revenue Commissioners’ requirements for deferred payment and warehousing of liabilities;
  7. g) the steps taken to reduce costs and/or to restructure the business.
  • In the context of the subject matter of this statement, the ODCE notes the Revenue Commissioners’ stated position that a declaration made as part of an application for the COVID-19 Temporary Wage Subsidy Scheme is not a declaration of insolvency.
  • The ODCE is independent in the discharge of its statutory functions and must have regard to the facts and circumstances in each individual case and, as such, cannot be prescriptive in a general sense as to how it might discharge its functions in respect of future cases. However, provided that directors’ decisions and judgments were:
  1. a) made on the basis of objectively verifiable evidence;
  2. b) based on assessments and assumptions that were reasonable in the context of the circumstances pertaining at the relevant times;
  3. c) made in good faith and the directors otherwise acted honestly and responsibly,

it is unlikely that the ODCE will consider that the company directors concerned should be restricted.

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