The European Union (Preventive Restructuring) Regulations 2022 introduced for the purpose of giving effect to the Preventive Restructuring Directive (EU Directive 2019/1023) have amended the Companies Act 2014 (the “Act”) to impose statutory duties on directors to have regard to the interests of creditors, where a director is aware that a company is, or is likely to be, unable to pay its debts, or becomes aware of its insolvency.
New duties to have regard to the interests of creditors
A new section 224A has been inserted into Part 5 of the Act, as follows:
“(1) A director of a company who believes, or who has reasonable cause to believe, that the company is, or is likely to be, unable to pay its debts (within the meaning of section 509(3)), shall have regard to –
(a) the interests of the creditors,
(b) the need to take steps to avoid insolvency, and
(c) the need to avoid deliberate or grossly negligent conduct that threatens the viability of the business of the company.
(2) The duty imposed by this section on a director shall be owed by them to the company (and the company alone) and shall be enforceable in the same way as any other fiduciary duty owed to a company by its directors.”
In addition a duty to have regard to the interests of creditors where the directors become aware of the company’s insolvency is included in the list of fiduciary duties owed to the company under section 228(1) of the Act.
Directors now have a statutory duty to have regard to the interests of creditors where there is a likelihood of insolvency. This duty is owed by the directors to the company and will be enforceable in the same way as any other fiduciary duty owed to a company by its directors.
Early warning tools
A new chapter 7 has been inserted into Part 5 of the Act. Section 271A provides that a director may have regard to “early warning tools” - a mechanism to alert the directors to circumstances that could give rise to a likelihood that the company will be unable to pay its debts and can identify the restructuring frameworks available to the company and signal to such directors the need to act without delay. This is not a prescriptive provision which requires action to be taken by directors; it merely acknowledges that directors may have regard to early warning tools, without prescribing adverse consequences should directors fail to do so.
These new amendments are considered in further detail in our recent briefing.