Accountant Detail Top Seven Sanctions Against Directors Of Insolvent Companies
Tony Mallon of W.O.McGrory & corp, CPA Registered Accountants, Drogheda, summarizes the top 7 legal remedies which are available to the courts in chasing directors of insolvent corporations.
While personal responsibility of directors remains the exception when considering how and where directors' duties are owed to creditors of a company it is useful in today's commercial climate to recall those scenarios in which private responsibility may be imposed.
If in the course of a winding up of a company, or where a company has been demonstrated to be bankrupt but is not being wound up, or in the course of an examinership ; any person found intentionally a party to the carrying on of the business of a company with intent to scam its creditors or for any fake purpose, could be guilty of fake trading under the 1963 Companies Act.
Section 297 C.A. 1963 makes provisions for a maximum penalty of imprisonment for a term not exceeding 7 years or a fine not surpassing 63,487 or both.
additionally, any such person may be responsible for all or any of the debt of the company as the Court may direct.
Diverting monies payable to the company to a director or shareholder, shouldering credit at a point in time when to the knowledge of the director there is no prospect of that credit being repayable, non-payment of monies to employees or to annuity funds would all constitute fraudulent trading.
In Re Hunting Lodge Limited, there was a secret arrangement to divert half the proceeds of the sale of the only remaining company asset to a building society account with fictitious names.
The company was ruined at the time.
This single exchange was ample to constitute fraudulent trading by the directors.
Reckless trading was introduced into Irish company law as a lesser offence to fraudulent trading to capture scenarios where there was no exact intention to scam.
If in the course of the winding up of a company or in the course of examinership proceedings or where a ruined company is not being wound up, it is located that any officer of the company was intentionally a party to the carrying on of the business in a reckless manner, then pursuant to Section 297A C.A. 1963, such person may be personally liable for all or any part of the obligations or other liabilities of the company.
- having regard to the general data, skill and experience that might moderately be expected of an individual in that position he ought to have known that his actions or those of the company would cause loss to any creditor of the company, or - he used to be a party to the contracting of new company debt and didn't really believe on reasonable grounds the company would be ready to pay that/other liabilities when falling due.
The defendant director must have data or imputed knowledge that his actions would cause loss to creditors ; it is not sufficient that there was a concern or doubt about the power to pay all creditors.
it is a defence to show that a director has acted in a honest and responsible demeanour.
[**] failure to actively partake of the affairs of the company may not provide relief from responsibility since the omission to exercise correct control may amount to recklessness.
Where a company is being wound up and is bankrupt and it has not been able to keep proper books of accounts in accordance with Section 202 C.A. 1990, the Court may declare that any officer or previous officer of the company who is in default of this obligation to keep proper books is personally responsible for all or such part of the liabilities of the company as may be stated by the Court where the inability to keep books contributed to the bankruptcy.
Case law shows that the Court will impose responsibility for such amount of the corporation's debt as are immediately due to the inability to keep proper books.
The Court might also find every officer of the company who is responsible for the failure guilty of an offence and a fine of almost 12,700 or imprisonment for a term not surpassing five years or both imprisonment and fine can be imposed.
Fraudulent preference is the wrongful favouring of one creditor over others by a company which is unable to pay its debt.
Demonstrating preference is critical and this can be tricky for a liquidator looking to test the payment ; for instance, the payment of a creditor who has simply been very diligent about following a debt will not amount to fraudulent preference.
Where a company is put into liquidation, any preference of a creditor in the prior half a year may doubtless be put aside as a fake preference.
Pat Kelly writes about W.O.McGrory and Company was founded by William McGrory in 1974 and has been operating from it’s Drogheda base at Carlington Lodge, Dublin Road, since1979. Bernadette McGrory Farrell and Paul Farrell are now the principal partners in the practice. Mcgrory offers Taxation Services and Audit Services in Drogheda County Louth.
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