The directors and other persons engaged in the management of a company may be made personally liable to contribute towards the payment of the debts of the company in a winding up, where they have been found to have been engaged in fraudulent or reckless trading.
Fraudulent trading requires that the officer was knowingly a party to the carrying on of the business of the company with the intent to defraud creditors or for any fraudulent purpose. There is reckless trading where an officer of the company was knowingly a party to the carrying on of the business of the company in a reckless manner.
Fraudulent trading is dealt with in another section and requires a higher standard of culpability. It carries serious criminal sanctions. The test for recklessness is easier to satisfy than that for fraudulent trading.
An application based on reckless trading may be taken against officers including, in particular, directors and shadow directors. Officers, who may be the subject of an order include liquidators, receivers, and shadow directors.
An officer can be declared to be personally liable without limitation for any or all of the company’s debts where it is proved that while he was a director or secretary (etc.), he was knowingly a party to the carrying on of the business in a reckless manner.
The application can be made by a receiver, liquidator, examiner, creditor or shareholder. The proceedings for reckless trading may be taken during an examinership, receivership or a winding up. They most commonly arise in an application made by a liquidator in a winding up.
The application may be made where there is no winding up but where there is a judgment which has not been satisfied or it is proved that the company can not pay its debts taking account of existing and prospective and contingent liabilities and in either case, that the main reason that it is not being wound up is the insufficiency of assets (i.e.failed execution or insolvency). In the case of reckless trading, an order can be made where the company is unable to pay its debts by reason of a failure to meet a statutory demand.
An applicant, who is a creditor or member or person on whose behalf the application is made, must be shown to have suffered loss by reason of the reckless (or fraudulent trading). This does not apply to an application by a liquidator.
Recklessness is generally understood to refer to consciously running a risk of a particular consequence that is likely to follow. An alternative view equates recklessness with gross negligence, which entails that the risk taking is not conscious, but that the risk is so high that a reasonable man must have appreciated it. Some Irish cases on the subject give support for the view that recklessness is equated to gross negligence so that it includes both of the above variants.
Some courts have pointed out that the presence of the word “knowing” in the provision, implies that the director (or other) should be aware of an obvious and serious risk and yet ignores that risk and does not care whether others suffer loss or damage. This may occur in circumstances where the director’s selfish desire to keep the company in being, overrides any concerns he may have for the interests of others.
It must be shown that there was an obvious or serious risk of loss or damage to the creditors. The respondent must not honestly believe on reasonable grounds that the company would be able to pay its debts. It must be shown the respondent took an unjustified risk based on what he knew or ought to have known.
A person who is foolishly optimistic may be held to have traded recklessly. However, if he acts as a reasonable person would have done in the circumstances he will not be liable even though his conduct might be deemed ill-advised after the event.
Requisite Intent I
There should be knowledge or imputed knowledge on the part of the director (or other) that the company’s actions would cause loss to the creditors. The Irish courts appear to have interpreted the provision narrowly, on the basis that it would not be in the interests of the community for businesses to cease to trade where there was a significant danger that a company was going to become insolvent.
It is a requirement that the company be insolvent. This means in effect that the company is unable to pay its debts of at least the statutory amount when demanded within 21 days, if execution is unsatisfied or if it is otherwise proved unable to pay its debts.
The director, shadow director or other officer must have been knowingly a party to the carrying on of the business in a reckless manner. Being a “party to” requires that he participate in, concurs in or takes part in the trading. It is not clear whether complete inaction suffices, such as where a person recklessly refrains from exercising any control, such that others mismanage the company.
Requisite Intent II
As with fraudulent trading, “carrying on” the business of the company may arise because of a single act. Accordingly, one significant transaction having serious consequences may ground an application, as may a series of smaller transactions.
In the following circumstances, there is deemed to be liability for “reckless” trading. Without prejudice to the general provisions on reckless trading, an officer of a company is deemed to have been knowingly a party to the carrying on of business in a reckless manner, if he was party to the carrying on of the business and having regard to the general knowledge, skill and expertise that may reasonably be expected of a person in his position, he ought to have known that his actions or those of the company would cause loss the creditors of the company or any of them.
By way of a further alternative, an officer of a company is deemed to have knowingly been a party to the carrying on of business in a reckless manner, if he 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 other debts, taking into account prospective and contingent liabilities.
The Court makes an order in the case of reckless trading requiring the respondent to pay a sum. The company becomes entitled to this sum, and it is thereby available for the creditors. The Court may order that the sum is to be payable to a specified person or persons, who have been particularly affected by the reckless or fraudulent trading in such proportions and in such priority as they order.
Where the applicant is a creditor or member, the court will have regard as to whether the creditor was at the relevant time, aware of the company’s financial state and notwithstanding that awareness, advanced the credit or otherwise agreed to the debt being incurred. If the creditor did so, there is less likely to be liability for “reckless” trading.
The courts in making an order declaring an officer personally liable to contribute may give such further directions as it thinks proper, for the purpose of giving effect to the declaration. It may make the liability of the officer a charge on any debt or obligation due from the company to him or on any mortgage or charge (or any interest in a mortgage or charge) on any assets of the company, held or vested in him or any person claiming as assignee through or from the director liable or any company or person acting on his behalf. It may from time to time make such further orders as are necessary for the purpose of enforcing the charge imposed.
If the officer shows that he acted honestly and responsibly in relation to the conduct of the affairs of the company or the matters or ground on which a declaration is sought, the court may, having regard to all the circumstances, relieve him either wholly or in part from personal liability on such terms as it sees fit.
References and Sources
Companies Act 2014 (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