Warning to directors of firms that may be facing insolvency

AS THE number of companies falling insolvent continues to rise due to worsening economic conditions, directors of such companies have been warned they may face High Court action for paying themselves excessive salaries

In the first six months of the year, corporate failures increased by 76 per cent, in large part due to failures among small developers and subcontractors in the construction sector.

While a major advantage of being a director of your own company is that you get to fix your salary, Harry Fehily, managing partner with Limerick law firm Holmes O'Malley Sexton, said directors who have paid themselves irresponsible salaries despite worsening circumstances could face disqualification from service as directors.

"In the event a company becomes insolvent and is wound up, a liquidator will inevitably scrutinise the actions of management/directors in the lead-up to insolvency. And this will include examining if excessive salaries were paid to directors," he said.

In April, the Office of the Director of Corporate Enforcement reported some 2,100 directors were restricted from being appointed as a director or otherwise being involved in the promotion, formation or management of any company.

Mr Fehily warned this figure will increase in the current climate if directors are found to have behaved irresponsibly, including paying themselves excessive salaries while their firm was experiencing difficulties.

He said company directors need to be extra vigilant in the manner in which they manage a company's affairs. They may need to review their salary, particularly when the company is facing insolvency.

"Depending on the facts, such salary payments could amount to a fraud being perpetrated on the company, its creditors or members within the meaning of section 139 of the Companies Act 1990. This Act allows a court, on application by a liquidator, receiver, creditor, contributory, examiner or the Director of Corporate Enforcement, to order the return of the property to the liquidator or the payment of a sum to the liquidator.

"Where a director continues to receive a significant salary in the face of economic uncertainty, and the company subsequently becomes insolvent, the director may also end up having to convince a High Court judge that he or she should not be restricted or even disqualified from acting as a company director in future," Mr Fehily added.

Directors should be aware liberal use of expense accounts while a company is in the zone of insolvency is not looked on favourably either, and the courts would not consider such actions to be responsible.