Company directors in Connacht need to know the legal duties and responsibilities of their role, especially in times of difficulty. Failure to do so can have serious consequences, according to Tom Byrne, Kiltimagh native and president of the Institute of Directors in Ireland.
Connacht business closures accounted for over 11 per cent of the 1,638 corporate insolvencies in Ireland in 2011 as reported by InsolvencyJournal.ie Recent figures released by Vision-net also show that the rate of company failures in Ireland increased by 20 per cent on the same period in 2010, a worrying trend that equates to an average of five companies collapsing each day.
A company is deemed to be insolvent when it is unable to pay its debts as they fall due, and for directors of companies facing this situation the legal responsibilities and actions required can be substantial.
In regard to directors’ legal duties, Tom Byrne advises: When a company is solvent, directors must act in the interests of its shareholders. However when a company is insolvent the position changes and the interests of creditors come first. Under insolvency legislation, a director is personally liable for reckless trading if a liquidator can show that he/she knew or ought to have known that there was no reasonable prospect of avoiding liquidation, yet continued to operate the business as normal. Directors in Connacht can protect themselves from this liability if they can prove that they took every possible step to minimise the potential loss to the company’s creditors and they must be seen to have actively done this.
“A director should never allow a company to accept credit if there is no reasonable expectation of the creditor being paid when the debt becomes due. Any director who knowingly does so could be guilty of fraudulent trading.
“To minimise the risk of liability it is important to follow these steps:
“Monitor the financial position of the company – Directors should regularly review the company’s financial position and keep themselves informed of its performance and prospects. Individual directors should raise any concerns over solvency with the board as a whole. If their fears are not heeded, they should repeat them, in writing, and take steps to protect their own position.
“Take advice – Directors must act responsibly and should consult with professional independent legal and financial advisers who can offer appropriate advice. Accurate and up-to-date information, along with access to financial and legal advice from appropriately qualified professionals, will significantly strengthen a director’s position in the event of a court hearing.
“Formulate a viable strategy – If the company has prospects, the board should formulate a strategy to restore it to a healthy financial position and avoid formal insolvency proceedings. This could mean the introduction of alternative trading strategies, disposal of assets, cutting overheads, or converting debt to equity. The chosen strategy must be a viable solution and have the full support of the board.
“Hold regular meetings – Board meetings should be held regularly and detailed minutes should be taken and circulated. Additional meetings should be held as and when significant events occur.
“Involve all directors – While the role of the finance director is key in this situation, all directors should be involved in any decisions made. Non-executive directors on the board will be best placed to objectively assess whether a company is able to continue trading or whether it can justify incurring fresh liabilities.
“Keep major creditors informed – It is important to keep major creditors, such as lending banks, informed of the company’s circumstances and of any strategies that may need their support.
“In today’s difficult trading environment it is vital that company directors not only understand but also implement their legal duties. Failure to do so can have serious consequences.”
To find out more about your role as a company director, visit www.iodireland.ie for more information.
