Eye for an eye Irish courts generally take an approach to reckless trading which attempts to balance the director’s wrongdoing with the liability, writes Ailbhe O’Neill Last month’s column looked at the issue of fraudulent trading under the Companies Acts. This month, the focus stays on directors and explores the issue of reckless trading under the Companies Acts. Reckless trading was introduced into Irish Law by s.138 of the Companies Act 1990. This inserted a new provision into the Companies Act 1963 which created a new concept of “reckless trading” leading to a civil penalty. This new Section applies to any person who, while an officer of the company, is knowingly a party to the carrying on of the business of the company in a reckless manner. Directors are thus covered by the provision but also other officers of the company ie. the company secretary etc. To be caught, however, the officer must have been party to the carrying on of the business of the company. The provisions on reckless trading apply only to companies being wound up. The most usual course is for the liquidator, receiver, examiner or a creditor to apply for an order declaring the officer to have traded recklessly and seeking to impose personal liability.

What is reckless trading? A person is deemed to have been trading recklessly under the legislation in the following circumstances: where he was a party to the carrying on of such business and having regard to the general knowledge, skill and experience that may reasonably be expected of a person in his position he ought to have known that his actions or those of the company would cause loss to the creditors or the company; or he was a party to the contracting of a debt by the company and did not honestly believe on reasonable grounds that the company would be able to pay the debt when it fell due for payment as well as all its other debts (taking into account the contingent and prospective liabilities). These categories of conduct are deemed to be reckless trading. They are not exhaustive of the types of conduct that may be caught and other conduct could be found by a court to constitute reckless trading. The meaning of these provisions was considered in a case called Re Hefferon Kearns Ltd. where it was held that an officer guilty of reckless trading was one who knew well that the way the business of the company was being carried on involved a serious and obvious risk of loss or damage to others and yet ignored that risk because he did not really care whether such others suffered loss or damage or because a selfish desire to keep his own company alive. Consequences of reckless trading What are the consequences of reckless trading? The civil penalty is that the officer may be held personally liable in whole or in part for the debts of the company. In theory, at least, this allows for an officer being held liable for the entire indebtedness of the company. In a number of cases, however, the courts have indicated that they will take a proportionate approach when imposing personal liability under the Companies Acts. In O’Keeffe v. Ferris, the court noted that any sanction imposed should be proportionate to any wrong doing. In Mehigan v. Duignan, a case concerning s. 204 of the Companies Act (failure to keep proper books of account) the court found that it should have regard to the extent to which the officer’s involvement in the contravention in question caused financial loss to the company, and if it did, whether that loss was reasonably foreseeable by the officer as being the result of his acts. Defence The legislation provides for a somewhat curious defence which relieves an officer found to have traded recklessly of liability where, in all the circumstances, he acted honestly and responsibly in relation to the acts complained of. The court can relieve such an officer of all or some of his responsibilities. Unlike fraudulent trading, reckless trading leads to civil penalties only and cannot lead to criminal liability. While an officer may be held liable for all of the debts of the company, the Irish courts have indicated that they generally take an approach which attempts to balance the wrong doing with the liability. n Ailbhe O’Neill is a barrister-at-law This article appears in the March edition of Irish Construction Industry Magazine