A Recession, a Pandemic, Company Law Amendments, and September 21st Pub Sessions

A Recession, a Pandemic, Company Law Amendments, and September the 21st Pub Sessions

Rory Hearn SS Law It’s ofcial - we’re back in a recession. Not long afer it was announced that Australia entered into a recession on September 2nd, Ireland followed suit in and by a gross domestic product (GDP) contraction of 6.1 per cent negative growth in the economy for the second quarter of 2020, hitting headlines on September 7th. Amidst the throes of another seismic event - the Covid imbroglio - companies have particularly fallen under the spotlight, unexpectedly animating Irish company law in 2020. In this article, partners Mr. Ruairi Rynn of William Fry, who has been a part of the frms Restructuring and Insolvency team for over a decade, and Ms. Ashling Walsh of Ronan Daly Jermyn, who heads up the Insolvency and Restructuring Department, give their take on how Irish company law has and will respond to the challenges that business owners and directors will face in these tumultuous times. Tey discuss everything from provisions in the Companies Act 2014 to the introduction of the Companies (Covid-19) Act 2020, which has been developed in tandem with the evolving Covid environment. RTE’s Six One and Nine O’ Clock News regularly portray companies attempting to remain solvent in spite of the pandemic. So, an appropriate point of departure is enquiring whether there has been a commensurate rise in insolvencies, liquidations or examinerships that have resulted therefrom in commercial practice. Surprisingly, this rise doesn’t seem to have materialised as of yet. In an interview with The Eagle, Ms. Walsh said: “I have certainly seen an uptake on giving insolvency advice, but [Ronan Daly Jermyn] haven’t seen a signifcant number of insolvencies. I expect that you will see that towards the end of this year and in 2021.” Similarly, Mr. Rynn stated in this regard that “thankfully from an economic perspective, we haven’t seen a particular uptake in liquidations or examinerships. To nuance this point – the ingredients for trouble are there, and [William Fry] do expect that there will be a need to restructure many of those businesses in due course, as some of them will simply not be able to survive.” On the foregoing point of restructuring, the recently drafed Company (Covid-19) Bill 2020 sought to amend the examinership process by extending the time needed for the commencement of a winding up of a company from the usual 100 days to 150 days, and also increase the debt threshold needed by a creditor to petition the court to have a company wound up from €10,000 for individual creditor debts and €20,000 for aggregate debts to €50,000. As Mr. Rynn further explained: “I sit on the Insolvency Subcommittee of the Company Law Review Group (CLRG) and worked on the recent report. Te 2020 Act does have one restructuring element in it in terms of examinership.” But what is the rationale behind this new aforementioned element? According to Mr. Rynn, “if a company went into examinership 100 days ago, how can they know what [their fnancial situation] will look like in 100 days’ time? You don’t know where it will be in 150 days, but the extra 50 days gives you a bit more scope.” Mr. Rynn explained that given that “there is a recognition that an examinership is too expensive and complex, the government is looking at potential rescue or restructuring processes for small and medium enterprises (SMEs). One can run an examinership through the Circuit Court rather than High Court, but practically it hasn’t reduced costs enough and the process is as burdensome in the Circuit Court as in the High Court. So there is within Government circles work underway to look at a potential alternative process for SMEs.” A topic that company law students will be well-acquainted with (or should be before exam season!) is what

Law Page 30 Tomas Courtney has coined as “one of the most far-reaching reforms introduced by the (2014) Act” - directors’ duties. Tese onerous duties, which are put on a statutory footing vis-a-vis section 228 in Part 5 Chapter 2 of the Companies Act 2014 (hereinafer referred to as the CA 2014), are expected to be adhered to by company directors, refecting Ireland’s culture of professional and sophisticated business acumen. Te 2016 Court of Appeal Re Walfab Engineering decision exacerbated these duties in that such duties are not afected or limited by economic troubles. Given that SMEs are visibly in economic trouble caused by the pandemic, will Courts continue to make decisions of Walfab’s ilk, or be more lenient with directors who may inadvertently breach their duties in the running of their business, given the impact that Covid is having on their fnancial situation? Mr. Rynn said: “I wouldn’t interpret the Walfab decision as one that prohibits or discourages directors from deciding that a company should try to trade it way out of difculties, I think the Heffernan Kearns case on reckless trading is quite clear on that - if you (as a director) think there is reasonable basis that the company can survive through trading through its difculties, directors are well-entitled to do that.” In the 2008 recession, cases arose whereby company directors delayed in paying monies to Revenue and traded with said monies as a going concern. Equally, cases arose whereby directors did not pay, or failed to remit employee taxes, such as PAYE Commissioner. Such It’s official - we’re back in a recession. or VAT, to the Revenue actions became synonymous with a fnding recklessly or fraudu- Not long after it was announced that of directors having acted lently within the meaning of section 610 CA Australia entered into a recession on 2014. Existing precedent in cases such as PSK Toomey Leasing (Ap- September 2nd, Ireland followed Construction in 2009 and pleyard) from 2016, and also section 610 of tors acting recklessly suit in and by a gross domestic product the CA 2014 catches direcor fraudulently if they have averted or put mon- (GDP) contraction of 6.1 per cent negative ies out of Revenue’s reach. Will the same hap- Rynn commented growth in the economy for the pen in this recession? Mr. that “in terms of reckless and fraudulent trad- students are aware of second quarter of 2020, ing, the reported cases that are pretty much the only cases there are! Te hitting headlines on September 7th. Appleyard case was the most recent reckless trading case which set the bar pretty high, frankly. On the basis that the bar is quite high, I don’t foresee a large glut of these cases as they didn’t happen too much previously.” Revenue calls these taxes “fduciary taxes”. A company or employer collects the VAT or income tax on behalf of Revenue. Te Revenue Commissioner has since allowed tax payers to “warehouse” Covid-19 related tax obligations until next year (2021). Tis facility extended to business owners does not extricate, but provides some breathing room from their company’s tax obligations at this difcult time. However, Mr. Rynn warned that “if [a company] utilises fduciary taxes to fund its business, it is in potentially tricky territory. Frankly in practice, it is not that uncommon for it to happen. Whilst it is something that could be the basis for a [restriction or disqualifcation] application, it doesn’t come up that ofen.” In light of the foregoing observation, Mr. Rynn pointed out that “the Ofce of Director of Corporate Enforcement (ODCE) have issued guidance on how restriction (section 819 CA 2014) and disqualifcation (section 839/842 CA 2014) applications made against directors will be viewed by the ODCE in light of Covid.” Academic books stress the point that liquidators are obliged to bring restriction applications against directors of insolvent companies vis-a-vis section 683. But what about the small-business owner who is trading bona fdes, and may become insolvent due to the efect Covid has had on their business? “In the majority of cases, the liquidators will recommend (in their report to the ODCE) that no action is taken against the director of the insolvent company, and the ODCE will relieve the liquidator of that obligation. So whilst Walfab can look stark, the test is, have you acted honestly and responsibly in the discharge of your [directorial] duties? You will fnd most people do.” In a July 7th Dáil speech, Tánaiste Leo Varadkar spoke of an ensuing “wave of insolvencies”. Has this wave occurred since then? Ms. Walsh said to expect more coming into 2021. She notes that “Deloitte issued a report a couple of

Page 31 Law weeks ago where they said the insolvencies for the last 6 months were about 273, and for the whole of last year (2019) there were 568, so the number of liquidations hasn’t risen that signifcantly…there’s a 12 per cent decrease in insolvencies for the frst 6 months of this year and that’s because we were in lockdown from March onwards, so in a way there hasn’t been any real increase [in insolvencies].” Ms. Walsh drew attention to the Banking Federation website where one will see there has also been a moratorium (a postponement or embargo on an action) put in place - generally, but not exclusively - from bank enforcement. Said moratoriums are efective until the end of September 2020. One would assume that banks are avaricious about chasing companies for loan repayments, but is that the case right now, given moratoriums have been put in place? Ms. Walsh responded: “I think that banks feel that this pandemic isn’t of a particular borrowers making, so the banks feel that they want to assist (SMEs) in the frst instance.” Whilst banks may be cognisant of companies fnancial difculties, what about another “big player” on the Irish fnancial scene – the Revenue Commissioner, colloquially known as the tax-man? Tere is a long-imbued policy desire in Ireland to protect the Revenue Commissioner, which was arguably exacerbated by the IMF bailout. Tis policy point was recently explicated by now-retired Justice Mary Lafoy’s 2015 Supreme Court JD Brian decision, which was reversed by sections 92 and 98(d) the Companies (Accounting) Act 2017. What was the efect of said Act? It guaranteed the Revenue Commission payment as a preferential creditor, notwithstanding the fact it may fall behind a fxed charge holder in the section 621 CA 2014 statutory order of priorities in a liquidation scenario. Moreover, the common law duty that a director owes a duty to creditors upon insolvency seen in Re Fredrick’s Inn was purported to be put on a statutory footing in Part 1 Head 9 of the Company’s (Covid-19) Bill 2020. In responding, Mr. Rynn said “Te JD decision was certainly fxed very quickly - how ofen do you see the government legislate so quickly!” Although said Bill is published on the Oireachtas website, “that duty didn’t make it into the Company (Covid-19) Act 2020 in the end – it’s not in recent CLRG report and didn’t end up fnding its way into the legislation…but what you are saying is right; pre-Covid, there has been a clear policy decision in this country which pre-dates the bailout. Te ‘Revenue preference’ was in the Companies Act 1963 and probably its precursors as well.” Tat begs the question: will struggling companies still have to On one hand, the public sentiment quiescently pay the Revenue Commissioner? Ms. Walsh ex- expresses dismay and seeks “support, not plained that she understands why perhaps sympathy.” On the other hand, the “the Revenue has had a light touch recently in terms of enforcement”. Speaking on the issue Government has rolled out schemes of Revenue Sherifs, she pointed out there is a activity across the over the summer months, namely moratorium on Sherif country, meaning that Revenue have instruct- the July stimulus and ed Sherifs not to “seize goods if the company is not in a position to pay its debts.” She also in- Restart Grant Plus schemes, dicated that she has not seen many Revenue panies wound up) in and also a 16 million Euro package for petitions (to have comthe High Court recently. It cannot be gainsaid pubs ahead of their tenuous that it is worth putting a question mark over Revenue and Banks 21st of September re-opening date. how economical the will be in their lenient enforcement coming into 2021. Te news cycle has captured two narratives surrounding Government supports for companies during Covid-19 that are difcult to reconcile with each other. On one hand, the public sentiment expresses dismay and seeks “support, not sympathy”. On the other hand, the Government has rolled out schemes over the summer months, namely the July stimulus and Restart Grant Plus schemes, and also a €16 million package for pubs ahead of their tenuous 21st of September re-opening date. Nevertheless, there is a panoply of events brewing; with two preeminent Irish voices present in Europe as of 2020 - Mairead McGuinness and Paschal Donohoe - the resurgence of Brexit talks in early September and the return of a recession, the trajectory of Ireland’s fnancial landscape