The Employment (Collective Redundancies and Miscellaneous Provisions) and Companies (Amendment) Act 2024 (the 2024 Act) was signed into law on 9 May 2024 and it will commence on 1 July 2024.
The 2024 Act enhances the protection of employees' rights and interests in the event of a company's liquidation, expands the time period for scrutiny when transferring assets in the period prior to insolvency, enhances the powers of the courts to order a related company to contribute to the debts of the company being wound up and to hold directors liable for reckless trading unless they actively take action to minimise loss to creditors.
The then Minister for Enterprise, Trade and Employment (Deputy Simon Coveney) stated, that the Companies Act 2014 (the 2014 Act) “demands that, in return for the privilege of limited liability, directors act in good faith and abide by the requirements of governance, transparency and commercial probity”. The 2024 Act increases the standards required of directors.
This article considers some key incoming changes to the 2014 Act, in particular those impacting on directors. Other features of the 2024 Act are considered here.
The key changes that affect directors' responsibilities and exposure to liability are as follows:
Duty to inform employees
There is a new obligation on directors to notify all employees and employee representatives of a winding up petition being presented by a company "at the time that petition is presented or as soon as reasonably practicable after such presentation” (section 571 of the 2014 Act). The court will consider compliance with this requirement when deciding on a winding-up order on a just and equitable basis.
Considerable changes to the rules governing liability for reckless trading
Substantial changes to the provisions relating to reckless trading are made in section 610 of the 2014 Act. The test for the courts is now an objective test as the 'knowingly' (subjective) requirement is removed. This means that from 1 July 2024, the court can find a director (or other officer of the company) personally liable for the debts of the company if they, among other things, ought to have known that they were a party to reckless trading.
In a further change, which also widens the possibility of liability, a director “may be found” to have been a party to reckless trading where they ought to have known that their actions “would be likely to cause loss” (as opposed to the current wording of “would cause loss”) to the creditors.
In addition, the defence to liability has been tightened: instead of relief from liability being available where it is shown that the director “acted honestly and responsibly”, relief will be granted only where a director took “such steps as were reasonably practicable” to minimise the loss to creditors.
These amendments have significant implications for directors' duties and obligations as well as for the risk of personal liability as a consequence of the subjective test being replaced with an objective one.
Other significant changes
Contributions on a winding up by a related company: The powers of the court have been expanded to enable a court to order a related company to contribute to the debts of a company being wound up “on a just and equitable basis” by deleting the bar on orders being made against related companies unless the court was satisfied that the circumstances that gave rise to the winding up of the company were attributable to the acts or omissions of the related company. Going forward, that is only a factor that a court needs to consider. A wider discretion has been given to the court so that it can take into account “such other matters as the court considers appropriate”.
Possibility of an extension of the time period when transactions may be deemed to be an unfair preference: The courts have been given the power to extend the time periods to “such longer period as the court considers just and equitable having regard to the circumstances of the act concerned” where an unfair preference to a creditor can be held to have arisen and the transaction invalidated (section 604 of the 2014 Act). This may lead to uncertainty surrounding transactions with creditors and give greater potential for these transactions to be challenged in future insolvency situations.
Payments made in the ordinary course of business are the only payments excluded from return order: Section 608 of the 2014 Act has been amended to confirm that only a payment “made in the ordinary course of business” can be excluded from being ordered to be returned in the case of an unfair preference to a creditor.
In practice, all of these changes impose a greater level of responsibility on directors and afford the courts wider powers and discretion in determining liability and in invalidating transactions. New procedures will need to be established to ensure compliance with the new notification and communication requirements with employees and their representatives. Directors will need to exercise caution and due diligence when engaging in transactions with creditors or related companies and seek advice about the validity or fairness of such transactions and be prepared for future challenges to such transactions for the recovery of assets. Directors will need to meet the higher thresholds in order to have a defence against reckless trading as the price for having limited liability has just got higher.
