Certain amendments to the reckless trading provisions of section 610 of the Companies Act 2014 contained in the Employment (Collective Redundancies and Miscellaneous Provisions) and Companies (Amendment) Act 2024 (the “Act”) came into force on 1 July 2024 (pursuant to S.I. 303 of 2024).
As detailed in our previous coverage of the Act here, a number of the amendments, including the removal of the requirement that reckless trading is required to be perpetrated “knowingly”, are intended to tidy up the existing language or render it more precise. However, the principal substantive change is the replacement of the potential defence of establishing that the relevant officer acted “honestly and responsibly” (section 610(8)) with an entirely new potential defence.
The new subsection provides that where it appears to the court that any person in respect of whom a reckless trading finding has been sought took, from the time that they knew or ought to have known that their actions or those of the company would be likely to cause loss to the creditors of the company, such steps as were reasonably practicable with a view to minimising such loss as they ought to have taken, the court may, having regard to all of the circumstances of the case, relieve them either in whole or in part from personal liability on such terms as the court thinks fit.
The old provision was rightly criticised for its circularity - given that reckless trading is, at its lowest, subject to an objective test, how could one in those circumstances be both reckless and responsible? The new provision is not entirely devoid of such circularity. However, the intention appears to be to allow the court to take into account such steps as common sense would indicate are prudent in the circumstances, such as obtaining financial and legal advice, having in place a rescue plan and monitoring progress with regard to the rescue plan by means of regular board meetings.
Practitioners have, since the inception of the reckless trading provisions, generally advised officers in these terms. However, due to the paucity of case-law in the area, practitioners have struggled to find any basis for such advice other than common sense. In a recent high profile decision of the High Court of England and Wales (Re BHS Group Limited, SHB Realisations Limited (formerly BHS Limited), Davenbush Limited, Lowland Homes Limited (each in liquidation) [2024] EWHC 1417(Ch)), in the context of wrongful trading to which a similar objective test applies, the court helpfully highlighted the necessity to have a “rational plan” to deal with the company’s issues in place and the importance of obtaining appropriate professional advice. It remains to be seen how the Irish courts will interpret the new provision.
Should you require further information about the issues discussed in this article, please contact any member of the Corporate Restructuring & Insolvency team or your usual Matheson contact.