by Jeremy Erwin , Michael Kelly December-06-2023 in Commercial & Business
Company law amendments in the Employment (Collective Redundancies and Miscellaneous Provisions) and Companies (Amendment) Bill 2023
A handful of noteworthy changes to the Irish corporate insolvency regime have been included in the Employment (Collective Redundancies and Miscellaneous Provisions) and Companies (Amendment) Bill 2023 (the “Bill”), which was presented to the Oireachtas on 27 October 2023. While the Bill will introduce a number of legislative changes in the area of employment, the focus of this article is on changes to the Companies Act 2014 (the “Act”) and in particular how those changes will affect the avoidance of transactions in a corporate insolvency.
The principal purpose of the Bill is to enhance the protection of employees in collective redundancy situations, and this includes amendments to the Act which will improve the quality and circulation of information to employees as creditors in corporate insolvencies and ensure that transactional avoidance remedies are made generally more accessible in insolvency situations.
Summary of the proposed changes
The proposed changes to the Act can be summarised as follows:
- New obligation to notify employees of certain events in an insolvency process: Amendments to Sections 571 to 573 and 594 of the Act impose new obligations to notify employees of insolvency events, such as the presentation of a winding up petition, appointment of a provisional liquidator or service of a statement of affairs and related matters.
- Contribution by related company on insolvency: Section 599 of the Act, which deals with contribution by a related to company to the debts of a company being wound up will be amended to modify the matters which the Court must have regard when this provision is invoked, by requiring the Court to consider the extent to which the related company contributed to the circumstances leading to the winding up as one of the factors to be taken into account generally, rather than as a standalone exclusion.
- Unfair preference: Section 604 of the Act, which deals with transfers which amount to an unfair preference is amended to increase the time periods in respect of which the Court can make an order to void a transaction as an unfair preference.
- Power to order return of assets improperly transferred: An amendment to Section 608 of the Act, which deals with improper transfers, to include a specific exclusion to ensure that payments made in the ordinary course of business are not captured by this section.
- Reckless trading: An amendment to Section 610 of the Act amending the test for reckless trading to specify that it is an objective test.
Comment
The proposed amendments with respect to notification to employees, while creating new statutory obligations for liquidators and directors, arguably do little more than put on a statutory footing what prudent liquidators and directors do in the ordinary course of a winding up.
The proposed addition of a new item (“the extent to which the circumstances that gave rise to the winding up of the company are attributable to the acts or omissions of the related company”) to the list of matters to be considered by the Court in an application for a contribution by a related company under Section 599 of the Act results in the provision becomes less restrictive, since this is only one among a number of other factors that can be taken into consideration by the Court in deciding whether to order a contribution by a related company.
The proposed amendment to the unfair preference provision in section 604 is more significant. As matters stand, if a transaction to an unconnected party occurred more than 6 months prior to winding-up (two years for a transaction is to a connected party) the liquidator cannot avail of this section to render the transaction void as an unfair preference. The proposed amendment would allow the Court to examine a transaction outside either period provided it is considered “just and equitable having regard to the circumstances of the act concerned”.
The proposed amendment to section 608 to expressly exclude payments made in the ordinary course of business from the scope of assets improperly transferred is unlikely to have a significant impact in practice, since this section already contained a provision allowing the entity receiving company property to show that it was received on a “bona fide” basis. However the change will remove any doubt that payments made in the ordinary course of business are excluded from the operation of the section.
The amendment to section 610 of the Act, while on one view significant, is not likely to have a significant impact in practice. The High Court (Lynch J.) in Re Hefferon Kearns Limited (No.2), the leading case in this area, interpretated the term “knowingly” contained in the predecessor to the Act to indicate that this is an objective test:
“The only test, in my view, is an objective one. Would a reasonable man, knowing all the facts and circumstances which the doer of the act knew or ought to have known, describe the act as “reckless” in the ordinary meaning of that word in ordinary speech? As I have said, my understanding of the ordinary meaning of that word is a high degree of carelessness.”
The amended section will delete the word “knowingly” from the definition of reckless trading. On this basis, the Courts will be supported by statute in continuing to use the objective test for reckless trading identified by Judge Lynch. The revised section also strengthens the objective elements of subsection (3) by lowering the threshold for the operation of the section to “would be likely to cause loss” instead of “would cause loss” and providing that the defence to a claim of reckless trading provided by subsection (8) may only be granted where a director took “such steps as were reasonably practicable” with a view to minimising the loss to creditors.
Conclusion
Taken together, the amendments set out in the Bill, if passed in its current form, will clarify aspects of Irish insolvency law and practice and remove areas of legal doubt for directors and liquidators of insolvent and near-insolvent companies.
UPDATE
The Bill was signed into law in May 2024 as the Employment (Collective Redundancies and Miscellaneous Provisions) and Companies (Amendment) Act 2024. The said act was enacted without any changes from text of the Bill on which this article was based.
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About the Authors
Jeremy Erwin
Jeremy specialises in insolvency, commercial litigation and dispute resolution, acting for a variety of companies and financial institutions in contract law cases, enforcement and recovery actions and in high value complex Commercial Court proceedings. Jeremy also specialises in intellectual property matters, including advising on registration and protection of trade marks and related rights and on trade mark disputes.
Michael Kelly
Michael is an senior associate solicitor in the Commercial Litigation & Dispute Resolution team at Hayes. He has experience advising commercial clients with respect to a wide variety of issues, in particular restructuring and insolvency cases. He regularly acts for receivers, liquidators and examiners in High Court and Commercial Court proceedings.