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Pitfalls and Opportunities for Company Directors
2
Important Legal Issues for Directors

• General rule limited companies provide limited
  liability for shareholders and directors
• Irish Law imposes sanctions on Company Directors
  which includes personal liability for debts of
  the Company and in some cases criminal sanctions
• Purpose of this seminar is to highlight some of
  the main areas of concern to Company Directors
• Certain areas of law apply in particular when
  Companies are going through a difficult financial
  period and I will deal with these areas
  specifically.

3
Common Law Duties

• General duty from common law on director to act
  in best interests of the Company
• General duty of skill care and diligence
• In general Company has right to sue director if
  he has breached his duties
• In some circumstances shareholders can take
  action against director also under this heading
• When Company is insolvent also duty to act in
  the best interests of Creditors

4
Statutory Duties

• Many duties and responsibilities imposed on
  directors in legislation mainly in Companies
  Acts.
• Will only focus on main ones where sanction is
  most severe i.e.personal liability for debts of
  the Company or criminal sanctions
• Many additional duties and sanctions have been
  imposed on Directors in different areas of law in
  recent years.

5
Section 31 Companies Act 1990

• Prohibition on Company entering into loans, quasi
  loans or credit transactions with directors or
  persons connected to directors
• Also prohibition on providing guarantees or
  security for loans to directors
• Sanctions are potentially severe
• Personal liability for all directors for debts of
  Company
• Possible criminal sanctions
• There are exemptions to some of the prohibitions

6
Section 29 Companies Act 1990

• Prohibition on Company entering into substantial
  property transactions with directors without
  first obtaining a resolution of the Shareholders
  Company
• If resolution is not passed transaction is
  voidable (usually a more important issue for
  Banks!)
• Personal liability can be imposed on directors
  for the debts of the Company

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Reckless Trading

• Directors knowingly carrying on business in a
  reckless manner.
• Deemed to be trading recklessy if Directors
  contracted debts for the Company and did not
  honestly believe on reasonable grounds that debt
  would be paid when it fell due.
• Directors can be made personally liable for debts
  of the Company.
• Defence if can persuade Court that Director acted
  honestly and reasonably.

8
Fraudulent Trading

• More serious offence.
• Trading while knowing that no reasonable chance
  that Creditors would be paid.
• Personal liability for debts.
• Criminal sanctions.
• More difficult to prove than reckless trading.

9
Fraudulent Preference

• Paying or disposal of Company property at a time
  Company is insolvent with a view to giving the
  Creditor preference over the other Creditors.
• Payment can be declared invalid.
• If Creditor puts such pressure on Directors to
  make payment that they felt they had no other
  choice it should not be fraudulent preference.
• No direct personal sanction on Directors although
  if this happens it is likely that a reckless
  trading action would follow.

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Things Directors of insolvent Companies should do
to protect themselves

• Convene and record frequent board meetings.
• Obtain financial advice preferably from an
  Accountant with insolvency experience
• Prepare a budget/business plan
• Keep Creditors informed of financial state of
  affairs of the Company
• Obtain legal advice in relation to insolvency law
• Consider opening a new Bank Account with new Bank
  so that all receipts can be lodged to that
  account and not to the Companys Bank Account in
  reduction of overdraft particularly where
  overdraft facility is personally guaranteed.

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Tax

• Section 1078 Taxes Consolidation Act 1997
• Where Revenue offence committed by Company with
  consent or connivance of Director the Director
  can be found guilty of an offence.
• Penalty 12,699 fine and/or 5 years in prison.
• Covers a wide rang of Revenue offences.

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Health Safety Legislation

• Safety Health and Welfare at Work Act 2005,
  Section 80.
• If offence by Company and the Acts have been
  authorised by Directors or happened due to
  connivance or neglect of Directors the Directors
  can be guilty of an offence.
• Penalty for some offences is fine of 3,000
  and/or imprisonment for 2 years.

13
Competition Law

• Competition Act 2002
• Certain offences e.g. price fixing, sales and
  market sharing etc.
• Section 14 provides Directors can be made
  personally liable if authorised or consented to
  the action which caused the offence to be
  committed.
• Aggrieved persons can sue Directors personally

14
Case Study Loan to Director

• Company X has two directors who are also both
  shareholders typical small Company
• Director/ owner treats Company funds like his own
• Director takes loans from Company for his
  personal purposes e.g. to purchase property
• If the loan is in excess of 10 of the Companys
  net assets then this was a loan made in breach of
  Section 31 of the Companies Act 1990
• The Companys auditor is obliged to report this
  offence to the director of corporate enforcement
  when it appears during the course of preparing
  the companys annual financial statements

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Loan to director continued

• The Office of the Director of Corporate
  Enforcement (ODCE) takes action against the
  director
• Recent case taken by ODCE on these facts where
  the Company director received a 34,000 fine and
  2 year prison sentence notwithstanding that he
  had repaid the loan
• Signs of the ODCE getting much tougher on these
  offences
• Companies going into liquidation means that a lot
  more of these offences will come to light as
  liquidators also have an obligation to report
  them to the ODCE

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Conclusion

• With the increased exposure for company directors
  the role is now something which should only be
  taken on if aware of the potential risks.
• What price enterprise and risk taking?