What is reckless trading and how can Directors be personally liable for the debts of a Company?
The Irish Companies Act of 2014 provides sanctions for Directors who are found to have been involved in reckless trading. This includes the possibility that a Director can ,in certain circumstances ,made personally liable for the debts of the Company of which he was a Director. Regrettably, the Act does not include a definition of “recklessness”. In order to understand what reckless trading means we have to look at relevant case law.
In this regard, some guidance is provided in a judgment in an English case of Shawinigan Limited -v- Vokins & Co. Ltd. In which it defined recklessness as “gross carelessness”. It expands on the definition by stating that it involved taking a risk which having regard to all of the circumstances would be described in ordinary parlance as “reckless”.
It is important to note that even where the Court may find that there was reckless trading the Court has a discretion to decide whether that Director should be personally liable for the debts of the company. If the court is satisfied that the Defendant acted honestly and responsibly then the Court can absolve the Director from personal liability.
This discretion is likely to be relevant in relation to any cases which are brought by creditors in relation to Covid related liquidations.
The ODCE issued guidelines in June 2020 relating to applications to have Directors restricted as Directors (which usually follows after a Company has gone into liquidation) .These guidelines set out the ODCE’s focus on assessing whether the Directors acted “honestly and responsibly” in continuing to run the business while technically insolvent and that the particular and specific circumstances brought about by Covid 19 would be taken into account.
There is a very high bar for a creditor to overcome if he or she is to have a Director fixed with personal liability for the debt of an insolvent company. In effect the loss to the creditor must have been foreseeable to a high degree of certainty.
Accordingly, if advising a creditor in bringing an application to have a Director made personally liable for the debts of the Company of which he was a director one has to be aware of the significant challenges involved in such an application.
For any information or advice on any Company Law matter, please do not hesitate to contact Brendan Dillon or Conor White on 01 2960666.