The Reckless Company Director

Many companies are affected by the ongoing Covid-19 pandemic. Sean O’Sullivan identifies issues that directors ought to consider in order to minimise the risk of incurring personal liability for the company’s debts

The cost of the coronavirus / Covid-19 pandemic to the Irish and global economy is still to be counted and, despite promising recent news on vaccines, it will continue to affect all our lives for the immediate future. The effect on small and medium Irish businesses, in particular, is yet to crystallise, with so many yet to reopen to any significant or permanent degree.

While I consider the potential life-line of business interruption insurance and the awaited High Court judgment in relation to same, this article is primarily intended to assist solicitors in advising directors of companies affected by the ongoing Covid-19 pandemic and the steps they ought to take if they find their businesses in a precarious state. It will also hopefully be useful in advising creditors and/or liquidators who may consider bringing claims for reckless trading against delinquent directors. Business Interruption Claims By letter of 27 March, 2020, the Central Bank set out its broad expectations of insurers regarding pandemicrelated claims, and in Guidelines published on 5 August, 2020 set out its specific expectations regarding claims under policies including coverage for pandemic-related business interruption losses.

However, and on foot of separate advices it received, FBD Insurance PLC refused coverage under a number of policies which purported to cover business interruption losses, on the basis that such coverage did not extend to losses incurred due to a pandemic, such as has resulted from the coronavirus / Covid-19. Over 11 days in October 2020, the High Court (McDonald J.) heard claims by four licensed premises that the refusal of coverage by FBD Insurance plc was unlawful.

The main issues raised before the High Court concerned interpretation of the contracts of insurance, including: • Whether there was cover for the effects of a pandemic or “disease”; • Whether the imposed closures arose from localised outbreaks; • Whether the losses resulted from the insured peril; • Whether the insurance covered only periods of enforced closure; and • Whether the trend in turnover prior to closure is relevant to the assessment of damages.

While the High Court reserved its judgment, which is expected early in 2021, for guidance we look to the English High Court’s judgment in Financial Conduct Authority v Arch Insurance, [2020] EWHC 2448 (Comm) which was relied upon in submissions made

Sean O’Sullivan BL is a practising barrister in the area of commercial litigation and corporate insolvency, with a speciality in privacy and data protection law

by the parties in the FBD hearing. Asked to interpret 21 policies offered by eight different insurers, the Court in Arch applied the following general principle of interpretation:

“[A] court must ascertain what a reasonable person, that is, a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the contracting parties to have meant by the language used.”

In its judgment, and while it generally construed the policy terms in favour of the insured where possible, the English High Court found that each policy must be strictly construed according to the wording therein and that while most of the policies did provide some form of cover, the coverage does not necessarily extend to the entire period affecting trade, nor for the entire losses cause by the effects of the pandemic.

The subsequent decision in TKC London Limited v Allianz Insurance PLC [2020] EWHC 2710 (Comm) emphasises this point, as the English High Court approved the refusal of coverage on the basis of the wording in the specific policy, notwithstanding that it was held out as covering “all risks”.

In light of the decisions in Arch and TKC, there is no certainty that the High Court will rule in favour of policyholders, nor that any such favourable ruling will extend to each of the six issues highlighted above, which may result in significant claims being properly refused by insurers. In the circumstances, relying on the potential proceeds from a business interruption policy may involve significant risk for the directors of companies, particularly as they may be determined to have traded recklessly and so be made personally liable for the company’s debts. Reckless Trading and Directors’ Personal Liability While the Companies Act 2014 details the consequences of reckless trading, it does not include any definition of “recklessness”, so we look to the following passage from the English High Court’s judgment in Shawinigan Ltd v Vokins& Company Ltd [1961] 3 All E.R. 396, 403:

“recklessness is gross carelessness – the doing of something which in fact involves a risk, whether the doer realises it or not; and the risk being such, having regard to all the circumstances, that the taking of that risk would be described in ordinary parlance as ‘reckless’.”

We can also look to the judgment of Charleton J. in ICS Building Society v Grant, [2010] IEHC 17 where he stated:

“Reckless trading must involve some lack of prudence

While the Companies Act 2014 details the consequences of reckless trading, it does not include any definition of “recklessness”

While these Guidelines may give direction and comfort to directors, they apply only to the ODCE’s approach to applications to restrict directors – they did not involve any amendment of the Companies Act and so are not binding on Courts in an application concerning reckless trading allegations

going beyond the risk-taking that is inherent in the enterprise of business so that a real and apparent risk emerges that a company will be unable to pay its debts.

In those circumstances, the controllers of a company must also think of their debtors and make provision for the repayment of obligations.”

Section 610 of the 2014 Act provides that the Court may impose personal liability on either a. A subjective basis, where an officer of the company was knowingly a party to carrying on business in a reckless manner; or b. An objective basis, where, due to the officer’s experience, skill and knowledge they ought reasonably have known that their actions would cause loss to the company’s creditors or where they contracted to a particular debt without reasonably and honestly believing that the company would be able to repay it and all its other debts.

This important distinction was emphasised in Lynch J.’s judgment in Re Hefferon Kearns Ltd, in examining the actions of directors in an application by an aggrieved creditor to impose personal liability for the company’s debts, where he stated that what needs to be proven is:

“knowledge, or imputed knowledge, that the [director’s] actions or those of the company would cause loss to creditors: it is not sufficient that there might be some worry or uncertainty as to the ability to pay all creditors.”

With this in mind, Lynch J. determined there was no subjective basis on which to impose personal liability, as the directors did not knowingly engage in reckless trading, but he did find there was objective evidence that one of the directors did so. However, having so found, he exercised the Court’s discretionary power to relieve that director of personal liability on that the basis that he was

“satisfied that the first defendant acted honestly and responsibly in relation to the conduct of the affairs of the company…”

It is this discretionary jurisdiction that will likely be pivotal in such applications following the pandemic, with the following statement from Lynch J. on the otherwise overly-harsh impact of the provisions of particular relevance:

“If, for example, a company became insolvent because of the domino effect of the insolvency of a large debtor, it would be reasonable for the directors to continue trading for a time thereafter, to assess the situation and almost inevitably they would incur some debts which would fall within para. (b) before finally closing down. It would not be in the interests of the community that whenever there might appear to be any significant danger that a company was going to become insolvent, the directors should immediately cease trading and close down the business.

Many businesses which might well have survived by continuing to trade, coupled with remedial measures, could be lost to the community.”

In this regard, it is notable that the ODCE (Office of the Director of Corporate Enforcement) issued Guidelines on 4 June, 2020 on what it would consider when deciding to require that applications to restrict directors of insolvent companies placed in liquidation be brought post-Covid. The Guidelines focus on how the ODCE will assess whether directors acted “honestly and responsibly” in continuing to trade while insolvent, and state that the specific, challenging circumstances wrought by the pandemic will be considered, including the following: • Whether the insolvency was genuinely outside the directors’ control; • The adequacy of procedures for monitoring the company’s affairs and finances; • What advice and/or actions were taken to reduce costs, restructure the business or otherwise in light of the insolvency/impending insolvency; • The basis for a belief in the company’s reasonable prospect of survival and whether and when it became apparent the company was hopelessly insolvent; • That they otherwise acted in good faith, honestly and responsibly.

While these Guidelines may give direction and comfort to directors, they apply only to the ODCE’s approach to applications to restrict directors – they did not involve any amendment of the Companies Act and so are not binding on Courts in an application concerning reckless trading allegations. Notwithstanding this, in the exercise of the discretionary jurisdiction to relieve directors of personal liability, the Courts may have regard to the Guidelines, and to the societal or community value of the company’s continued trading, as emphasised by Lynch J. in Hefferon Kearns.

Finally, it should be noted that there is an exceptionally high bar to be reached in an application to impose personal liability, as emphasised in the Court of Appeal’s judgment in Re Appleyard Motors Limited, [2016] IECA 280 where Hogan J. stated:

“it is not enough that, viewed objectively, an experienced director ought to have known that his actions or those of the company might cause loss to a creditor. [s. 610(3)(a)] imposes an even more exacting requirement: viewed objectively, ought an experienced director to have known that the actions in question would cause loss. This suggests that the loss to the creditor must have been foreseeable to a high degree of certainty.”

That the standard of proof is so exacting ought be considered carefully by both directors and applicants in the context of such applications, in assessing the prospects of the success of the application or the defence. Conclusion

While it is a very high threshold to be reached, in considering whether to continue trading, directors will need to carry out a “sober assessment” of the company’s position, seek advice and act reasonably in any attempts to save the business, without becoming “reckless to the realities and with the fact that they should put up the shutters.”

If directors act in good faith, honestly and responsibly, Courts will be slow to impose personal liability in light of the pandemic, but this will require pro-activity and demonstrable evidence for their actions, in line with the ODCE Guidelines and the case law examined herein.

Trea McGuinness is a senior associate in the Private Client Department of BHSM Solicitors. Jessica Hickey is the principal solicitor of Hibernian Law Solicitors and the Chair of the DSBA Probate & Taxation Committee

Practical Paths to Probate

Trea McGuinness and Jessica Hickey review a new book on Probate - Practical Probate, written by Karl Dowling, Barrister and Susan Martin, Solicitor

Karl Dowling BL and Susan Martin have joined forces again, after the successful publication of the 3rd edition of Civil Procedure in the Circuit Court. Their latest collaboration, Practical Probate, provides just that, a practical guide through Probate procedures, from Will drafting to extraction of Grants of Administration.

This manual comes at an opportune time, given the introduction of various changes to Probate procedures by the Probate office, implemented in an effort to streamline Probate procedures and to reduce the volume of rejected applications for Grants of Administration.

This book provides a concise reference guide, similar in style to the much loved Probate in a Nutshell, written by the late Eamonn G. Mongey, BL. It covers a wide range of areas, such as estate planning, Will drafting and the administration of different types of estates. It includes a detailed chapter on Enduring Powers of Attorney, looking at the execution and subsequent registration of Enduring Powers of Attorney. It also touches on Probate Office procedures and the various applications that can be made to the Probate office before addressing Non-Contentious Probate litigation.

The book includes a number of useful precedents and checklists, all in an easy-to-follow handbook.

This is an excellent go-to guide, particularly for newly qualified solicitors or indeed, any solicitor new to, or returning to, the area of Probate practice.

Issues encountered frequently by Probate Practitioners are also addressed, including matters such as capacity, validity of Wills, caveats and citations and estates with a foreign element.

The Inland Revenue Affidavit was replaced in September 2020 by the introduction of the Statement of Affairs (Probate) (Form SA2) and further changes to Probate procedures are expected early in the New Year. Practical Probate, coupled with relevant updates on the Courts Services website and the Revenue Guidelines on the Form SA2, will certainly greatly assist Solicitors in following the new regime. P Roundhall, €55.00.

Karl Dowling BL is a Barrister with a specialist practice in Probate Litigation and regularly appears before the High Court and Circuit Court. He is a Founding Member of the Probate Bar Association.

Susan Martin is a Solicitor with a busy Dublin practice, and has significant experience in the administration of estates and probate litigation. She is an Officer of the Dublin Solicitors Bar Association and a Member of the Council of the Law Society of Ireland.