Failure to Keep Accounts I
If a company that is being wound up is unable to pay all of its debts and has contravened the obligations regarding the keeping of accounts, then if the court considers that the contravention
- contributed to the inability to pay the debts;
- resulted in substantial uncertainty as to the assets and liabilities of the company; or
- substantially impeded the orderly winding up of the company;
then the court may, on the application of the liquidator, creditor or contributory declare, as it thinks proper to do so, that any one or more officers or former officers of the company who are in default in relation to the contravention, shall be personally liable, without limitation, for all, or such part, of the debts of the company, as may be specified.
Failure to Keep Accounts II
The person bringing the application may give evidence or call witnesses. If the court makes a declaration in these terms, it may give such directions as it thinks fit to give effect to it. In particular, it may make an order providing the liability of any person under the declaration shall be a charge on any debt or obligation due from the company to that person or on any mortgage or charge, or interest in any mortgage or charge, held or vested in that person.
The court may not make a declaration of personal liability in respect of a person,
- it considers that the person took all reasonable steps to secure compliance by the company with its obligations or
- where the person had reasonable grounds for believing and did believe that a competent and reliable person, acting under the supervision or control of a director of the company who had been formally allocated such responsibility, was charged with the duty to keep accounts and was in a position to discharge that duty.
Fraudulent / Reckless Trading
An application can be made to hold an officer liable personally liable in consequence of reckless or fraudulent trading. The application may be made by a liquidator, receiver or examiner. It may also be made by any creditor or shareholder, who has suffered loss or prejudice. The conduct of each director must be looked at separately. The onus is on the applicant to show the requisite degree of recklessness.
- any person was, while an officer of the company, knowingly a party to the carrying on of any business of the company in a reckless manner (reckless trading), or
- any person was knowingly a party to the carrying on of any business of the company with intent to defraud creditors of the company, or creditors of any other person or for any fraudulent purpose (fraudulent trading),
the court, on the application of the liquidator or examiner of the company, a receiver of property of the company or any creditor or contributory of it, has the following powers.
The Court may it thinks it proper to do so, order that the person concerned shall be personally responsible, without any limitation of liability, for all or any part of the debts or other liabilities of the company as the court may direct.
The provisions have effect notwithstanding that
- the person in respect of whom the declaration has been sought may be criminally liable in respect of the matters on the grounds of which such declaration is to be made; or
- the grounds of which the declaration is to be made occurred outside the State.
Fraudulent Trading I
Personal liability can be imposed on directors and others for so-called fraudulent trading. Any person who is knowingly a party to the carrying on of the business of a company with intent to defraud its creditors (or the creditors of another person or company) or for any fraudulent purpose, may be held personally liable for the company’s debts without limit.
Fraudulent trading has serious criminal consequences. It is also an offence, triable on indictment or summarily to be a party to fraudulent trading. It is subject on conviction on indictment to imprisonment for up to seven years and/ or a fine.
The application to make an officer or other personally liable for a company’s debts can be made by a liquidator, receiver, examiner, creditor or shareholder. It can be made against any person who is involved in carrying on the business of the company and who was knowingly a party to the fraudulent activity. The liability can even extend to creditors in particular circumstances.
If the company carries on business and, in particular, incurs debts and takes credit where the directors know that there is no reasonable prospect of paying the creditors, an intent to defraud may be inferred. It implies that the directors or other in control have acted dishonestly.
Fraudulent Trading II
Fraudulent trading involves deliberate and intentional conduct. The parties concerned must have undertaken business with the intention to defraud. In practice, it is difficult to prove fraudulent trading, unless there has been blatant dishonesty.
The possibility of liability for reckless trading was introduced by later legislation and it easier to prove. Accordingly, the liquidator (and others) are more likely to rely on this ground in seeking to have directors and other officers made personally liable for the debts of an insolvent company.
The provisions as to fraudulent trading do not apply in relation to the carrying on of the business of a company during a period when the company is under the protection of the court.
Deemed Reckless Trading
An officer of a company is deemed to have been knowingly a party to the carrying on of any business of the company in a reckless manner if—
- the person was a party to the carrying on of such business and, having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his or her position, the person ought to have known that his or her actions or those of the company would cause loss to the creditors of the company, or any of them or
- the person was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts (taking into account any contingent and prospective liabilities).
An officer in relation to a company includes a director, statutory auditor, liquidator, provisional liquidator of the company, receiver and a shadow director.
The court may make a declaration on the ground of reckless trading, if the company is unable to pay its debts, based on the statutory tests for insolvency and the applicant for such a declaration, being a creditor or contributory of the company or any person on whose behalf such application is made, suffered loss or damage as a consequence of any such behaviour.
In deciding whether it is proper to make a declaration on the honest belief ground, the court shall have regard to whether the creditor in question was, at the time the debt was incurred, aware of the company’s financial state of affairs and, notwithstanding such awareness, nevertheless assented to the incurring of the debt.
Where the court makes one of the above declarations it may provide that sums recovered under the power shall be paid to such person or classes of persons, for such purposes, in such amounts or proportions at such time or times and in such respective priorities among themselves as such declaration may specify.
Further Orders to Enforce
The consequence of a finding of reckless trading is that the court may make a declaration that the officer concerned, is to be personally liable to the extent declared. The court may decide to declare the person concerned, partly or wholly liable for the company’s debts. The court’s discretion has considerable discretion in relation to the order it may make.
Where the court makes a declaration that the respondent should be liable personally, it may give such directions as it thinks proper for the purpose of giving effect to the declaration. In particular, the order or a supplemental order, may include provision for making the liability of any person under the declaration (the respondent) a charge on any debt or obligation due from the company to the respondent, or any mortgage or charge, or any interest in any mortgage or charge, on any assets of the company held by or vested in the respondent or any company or other person on the respondent’s behalf, or any person claiming as assignee from or through the respondent or any company or other person acting on behalf of the first-mentioned person.
An “assignee” includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest created. It does not include an assignee for valuable consideration (not including consideration by way of marriage) given in good faith and without notice of any of the matters constitution the grounds on which the declaration is made.
Reckless trading occurs when a director or de facto director (officers) of the company, is knowingly a party to the carrying on of its business in a reckless manner. Reckless trading may occur under this broad test or may be deemed to occur in certain circumstances.
An officer is deemed knowingly to have carried on the business in a reckless manner, if
- he is party to the carrying on the business and having regard to the general knowledge, skill, and experience that might reasonably be expected of a person in his position, he ought to have known that his actions or those of a company would cause loss to creditors or
- he was party to contracting a debt by the company and did not honestly believe on reasonable grounds, that the company would be able to pay the debt as it fell due for payment, taking into account other debts, contingent, and prospective liabilities.
Recklessness is generally understood as gross carelessness. This involves taking a risk, whether consciously or not, which carries the likelihood that the consequence will follow. The greater the potential harm, the less the degree of risk that will constitute recklessness.
Reckless trading is more restrictive than fraudulent trading, in the sense that it may only be taken against an officer. An officer includes an auditor, liquidator, director and shadow director. It does not cover employees or contractors.
The carrying on of business implies that the officer concerned is involved in the company’s business. A director has obligations to be aware of and manage the company’s business. He cannot absolve himself by closing his eyes. Where he knew or ought to have known that the actions would cause loss, he may be liable.
The position of each director is considered separately. The responsibility is not collective as such.
Recklessness may be constituted by gross carelessness, where a risk is significant and serious. However, the officer concerned must be “knowingly” a party to the carrying on of the business in the above manner. Purely gross negligence, without any conscious adverting to the risk, is probably insufficient.
Reckless trading may arise where a director or secretary is involved in ordering goods or services on credit without an honest belief held on reasonable grounds, that the company can repay the debt when due.
The court may impose unlimited or partial liability for the company’s debts. If the director acted honestly and responsibly, he might be relieved wholly or partly of the liability.
Defence to Liability
Where it appears to the court that any person in respect of whom a declaration has been sought on the basis of fraudulent trading, has acted honestly and responsibly in relation to the conduct of the affairs of the company or any matter or matters on the ground of which such declaration is sought to be made, the court may having regard to all the circumstances of the case, relieve him or her either wholly or in part, from personal liability on such terms as it may think fit.
In order to avoid liability for reckless trading, the director or other officer must honestly believe on reasonable grounds, that there is a valid basis for contracting the relevant debt. He must also show that trading was not such that he ought to have known on the basis of the general knowledge, skill, and experience that might reasonably be expected of him, that the trading would damage creditors.
In the first case, the contracting of debts is the focus. In the second case, regard is had to the conduct of the company’s trade in the broader sense.
Piercing Corporate Veil
It is a fundamental principle of company law that the shareholders of a limited liability company are not personally liable to contribute to its debts in a winding up or otherwise, beyond the initial consideration for their shares, when allotted by the company. In general, provided that a company is operated in accordance with company law provisions and there is no fraud, shareholders will not be made liable for the company’s debt.
There are limited circumstances in which shareholders may be held personally liable for the company’s debts and obligations. It is possible in principle for a company to be an agent of the shareholder. This would be highly exceptional. In these cases, the shareholders may be liable.
Where the officers have conducted business without any regard to the company’s separate identity, the courts may look through the company and hold that the officers were party to the relevant contract and are thereby liable in person.
A liquidator may seek to recover money which has been wrongfully transferred or diverted by the company’s officers, such as directors and others. In this case, the liquidator may use the general law to recover assets which have been wrongfully taken or removed from the company.
An order may be made to recover company property that has been wrongly disposed of by directors, officers, or others. An order may be made for recovery and possession of property which is in the custody of a third party, which belongs to the company.
Officers and shareholders who are or are about to abscond, leave the country or conceal company property may be arrested and examined in relation to the company’s affairs. An order may be made to seize papers and records. An order may be granted preventing certain persons connected with the company from reducing their assets or removing them from the state.
References and Sources
Companies Act 2014 S. 608 – S. 610 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.16 Courtney
Keane on Company Law 5th Ed. (2016) Ch.33 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Gore Browne on Companies
Palmer’s Company Law