ODCE offers comfort to firms facing insolvency amid Covid-19

The State’s corporate watchdog has moved to ease concerns of directors of businesses seeking to trade through financial problems caused by the coronavirus economic shock, but where the company ultimately goes under.

When liquidators are appointed to insolvent companies, they must issue a report to the Office of the Director of Corporate Enforcement (ODCE) and initiate court proceedings seeking to have directors restricted, unless they are granted a waiver by the watchdog from doing so.

However, the ODCE has issued guidance this month indicating that if a company becomes insolvent because of events outside of directors’ control – and they are seen to have acted honestly and responsibly – the agency would not generally take the view that the directors behaved improperly.

While this has been a long-standing general stance of the ODCE, it has sought to clarify the situation amid an expected surge in insolvent liquidations as companies come to the realisation they will not be able to survive the havoc created by Covid-19.

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“In the case of those companies that do enter insolvent liquidation over the coming months, the ODCE will have due regard to the impacts of the pandemic as it carries out its functions of examining, and adjudicating upon, liquidators’ reports,” the watchdog said.

Financial monitoring

The ODCE said that both liquidators and the watchdog would look at the “adequacy of the directors’ processes and procedures for monitoring the company’s financial position” as they dealt with the crisis and whether they sought professional advice relating to possible insolvency.

The agency would also consider the basis on which a company’s directors decided they could trade out of difficulties, including the potential impact of government grants and supports, and the length of time a company continued in business after it was apparent that it was insolvent.

"The ODCE cannot say that no directors of companies that have been made insolvent by the Covid-19 crisis will be subject to restriction order proceedings, as each case will be examined on its facts and the steps taken by the directors in totality," solicitors Mason Hayes & Curran said in a note to clients.

“However, it ought to offer a reasonably high degree of reassurance to those directors who are attempting to make genuine efforts to rescue businesses from financial difficulty in the context of unprecedented uncertainty in almost every sector.”

Business survival

The Central Bank warned last week in its Financial Stability Review that more than 200,000 Irish companies operate in sectors with direct or intermediate levels of exposure to the Covid-19 crisis. While the Republic and its trading partners are currently emerging from widespread lockdowns, many companies, particularly in the retail, pub, restaurant, hospitality and leisure sector, will not survive.

While the Government stepped in to subsidise the wages of close to 500,000 workers in companies hit by a revenue slump in recent months and defer tax liabilities, and while banks have been offering payment breaks on lending, Central Bank deputy governor Sharon Donnery highlighted in a speech that the “risk remains of liquidity turning to solvency issues”.

Accountancy and advisory firm PKF O'Connor, Leddy and Holmes partner Declan de Lacy told the Sunday Times this weekend that insolvent liquidations of Irish companies may top 1,000 this year, compared with 426 in 2019.

Meanwhile, private Irish companies hit by the Covid-19 crisis and whose financial years drew to a close last December face challenges completing their annual results ahead of a deadline at the end of September.

Accountancy practitioners see a marked increase in qualified audit opinions, and a lot of disclosures in directors’ reports on the impact of Covid-19 on businesses remaining a going concern.