What is a sole trader?

A sole trader is a business owned and controlled by one person, generally trading under his/her own name or using a registered business name. If the business owner decides not to trade under his/her own name it is necessary to register the business name with the Registrar of Business Names. There is a small fee attached to this registration but otherwise it is a very simple process.

Advantages of trading as a sole trader:

1. It is much less onerous in terms of structure and formalities to set up.

2. There is no requirement to file annual accounts other than when required as proof of income for income tax purposes.

3. Closure of the business is equally easier to effect.

Disadvantages of trading as a sole trader:

1. The owner is personally liable for all the debts of the business.

2. Because ownership rests with one person, raising capital can be more difficult. Many businesses find it necessary to become Limited Companies as they grow to facilitate further growth and development.

3. The profits of the business are considered personal income and used in the calculation of income tax liability which is taxed at higher rates than Corporation Tax for Limited Companies.

What is a Limited Liability Company?

A Limited Company is a separate legal entity from the people who operate and control it. The owners are shareholders in this legal entity. The Company has Directors who make decisions on behalf of the Company. The Company itself has sole responsibility for all the debts of the Company, which are restricted to the paid-up share capital of the Company, hence the term Limited Liability.

Advantages of trading as a Limited Liability Company:

1. The shareholders are only liable to lose the share capital they have invested in the company.

2. Raising Capital to fund growth and development can be easier.

3. There may be many owners of the company, and it continues to exist despite the death, retirement or resignation of the Directors.

4. The Company can make pension contributions as an expense.

Disadvantages of trading in a Limited Liability Company:

1. In practice, lenders generally seek to have personal guarantees against loans given, which reduces the benefit of limited liability.

2. Setting up a company is more expensive than trading as a sole trader.

3. Legislative requirements in making annual returns to the Companies Registration Office are more onerous. Annual Accounts must be filed with the Companies Registration Office also.

4. Company Directors are subject to extensive legal responsibilities, including being made personally liable for all the debts of the Company if they are proven to have traded recklessly.

For further advice or information contact us and we will chat through your options with you.

What are the duties of the board of directors and of individual directors?

The main function of the board of directors is to supervise the management of the company and to set its policy and direction. The failure of the board to maintain control over the affairs of the company can contribute to company failure.

There is no prescribed agenda or timing of board meetings. However, a board should meet regularly to review the company’s state of affairs.

Mention has already been made earlier of a number of the statutory obligations which apply to all directors. Apart from these, a director has a number of general duties including:

- to use their skills and a reasonable level of care in the performance of their duties;

- to attend meetings regularly (but not necessarily every time);

- to act in good faith in the company’s best interest;

to exercise powers for a proper purpose, namely for the benefit of the members or the purposes for which the company was set up; and

to avoid either actual or potential conflicts of interest between their personal interests and those of the company.

Common law duties of directors (the duties created by the courts)

The common law duties require that:

• directors must act in good faith and in the company’s interest and not use their powers for personal gain or for the benefit of others at the company’s expense – for example directors should pay the market value for company assets;

• directors must not profit from being a director and must account for any profit secretly obtained – for example a director who is also a director of a second business cannot use any confidential information they receive as a director of the first company to benefit that second business; and

• directors must act with due care, skill and diligence – for example, directors need to meet regularly to review the company’s finances and take action to correct any problems.

What personal entitlement do directors have to company property?

One of the most important principles which a company director must learn is that a company’s assets are not their property (even though they may be the sole or primary shareholder). This is because there will often be many other parties with a financial interest in the business, including in particular the company’s employees and its creditors.

Therefore, company directors should not treat company assets as belonging to them unless the property has been properly assigned to them.

The most appropriate methods by which a director can obtain value from the company are as follows:

• Dividend

A dividend is the money which shareholders receive as earnings from their investment in the company. A dividend can only be declared at the AGM and must only be paid out of the profits which have been accumulated by the company. All eligible shareholders must receive the dividend.

• Contract of Employment

A director can be an employee of the company and may take a salary in line with that contract. However, this salary must be disclosed in the annual accounts of the company.

• Directors’ Loans

There is general prohibition on directors drawing down funds from the company for personal purposes. However, it is permitted in certain defined circumstances, and where it occurs, the funds will often be treated as a company loan to the director. One of the permitted circumstances is where the aggregate value of loans to directors does not exceed 10% of the company’s ‘relevant assets’.

Further information on this term and on the other exceptions is available from the ODCE at www.odce.ie. A breach of the permitted circumstances may constitute an offence by the company’s directors.

What happens if the company is in financial trouble?

If a company cannot pay its debts as they fall due, then the company is deemed to be insolvent. If the company continues to operate while in this situation and in disregard of the interests of its creditors and other stakeholders, the directors may be held personally liable for the consequences, including any debts which the company may incur while trading in an insolvent manner.

The director will also be at the risk of prosecution, restriction or disqualification if they fail to act within the law and discharge their duties in a responsible manner. Some 300 company directors have been restricted to date. A summary of the main scenarios for companies who find themselves in financial trouble are explained below.

Trading difficulties

If a company finds it difficult to pay its debts, the directors must favour the interests of the people to whom the company owes money (creditors).

Reckless trading

If directors help to create a company debt knowing that the company will not be able to pay the creditor, they may have to pay some or all of the company’s debts themselves if this is ordered by a court.

Insolvent liquidation

If a company does not have enough money to pay creditors and the company is later wound up, the directors must prepare a statement of its assets and liabilities and co-operate with the liquidator.

Struck off insolvent companies

If directors fail to arrange for the liquidation of a company that owes a large debt to one or more creditors, the High Court may disqualify them from acting as directors if the company is later struck off the Companies Register for failing to file its annual returns

Conclusion

A more detailed information book on directors is available under

Decision Notice D/2002/1 from www.odce.ie.

If in the course of a winding up of a company, or where a company has been shown to be insolvent but is not being wound up, or in the course of an examinership; any person found knowingly a party to the carrying on of the business of a company with intent to defraud its creditors or for any fraudulent purpose, may be guilty of fraudulent trading under the 1963 Companies Act. .

Section 297 C.A. 1963 provides for a maximum penalty of imprisonment for a term not exceeding 7 years or a fine not exceeding €63,487 or both.  In addition, any such person may be personally responsible for all or any of the debts of the company as the Court may direct.  Diverting monies payable to the company to a director or shareholder, incurring credit at a time when to the knowledge of the director there is no prospect of that credit being repayable, non-payment of monies to employees or to pension funds would all constitute fraudulent trading.

In Re Hunting Lodge Limited , there was a secret arrangement to divert half of the proceeds of the sale of the only remaining company asset to a building society account with fictitious names. The company was insolvent at the time. This single transaction was enough to constitute fraudulent trading by the directors.

Reckless trading

Reckless trading was introduced into Irish company law as a lesser offence to fraudulent trading to capture situations where there was no actual intent to defraud.  If in the course of the winding up of a company or in the course of examinership proceedings or where an insolvent company is not being wound up, it is found that any officer of the company was knowingly a party to the carrying on of the business in a reckless manner, then pursuant to Section 297A C.A. 1963, such person may be personally liable for all or any part of the debts or other liabilities of the company.

An officer of a company is knowingly a party to the carrying on of any business of the company in a reckless manner if:

-    having regard to the general knowledge, skill and experience that might reasonably be expected of a person in that position he ought to have known that his actions or those of the company would cause loss to any creditor of the company, or
-    he was a party to the contracting of new company debt and did not honestly believe on reasonable grounds that the company would be able to pay that/other debts when falling due.

The defendant director must have knowledge or imputed knowledge that his actions would cause loss to creditors; it is not sufficient that there was a concern or uncertainty about the ability to pay all creditors.  It is a defence to show that a director has acted in an honest and responsible manner. However, failure to actively take part in the affairs of the company may not provide relief from liability since the failure to exercise proper control may amount to recklessness.

Failure to keep proper books of account

Where a company is being wound up and is insolvent and it has failed to keep proper books of accounts in accordance with Section 202 C.A. 1990, the Court may declare that any officer or former officer of the company who is in default of this obligation to keep proper books is personally liable for all or such part of the debts of the company as may be specified by the Court where the failure to keep books contributed to the insolvency. Case law shows that the Court will impose liability for such amount of the company’s debts as are directly attributable to the failure to keep proper books.  The Court may also find every officer of the company who is responsible for the failure guilty of an offence and a fine of up to €12,700 or imprisonment for a term not exceeding five years or both imprisonment and fine can be imposed.

Fraudulent preference

Fraudulent preference is the wrongful favouring of one creditor over others by a company which is unable to pay its debts.  Any such payment is invalid. Demonstrating preference is crucial and this can be difficult for a liquidator looking to challenge the payment; for example, the payment of a creditor who has simply been very diligent about pursuing a debt will not amount to fraudulent preference.

Where a company is put into liquidation, any preference of a creditor in the prior six months may potentially be set aside as a fraudulent preference. Where the creditor is a director of the company or a person connected with a director, the liquidator can consider any payments made in the previous two years. Any repayments of debts owed to directors or shareholders by an insolvent company are likely to be scrutinised most closely by a liquidator.

A Voluntary Winding Up

On a voluntary solvent winding up of a company, the directors of a company must make a statutory declaration to the effect that the company will be able to pay its debts in full within twelve months from the commencement of the winding up. Where it is subsequently proved that the company is unable to pay its debts, the Court may, declare that any director who made the declaration of solvency is personally responsible for all or any of the company’s debts.

Other sanctions

Aside from personal liability, the following sanctions may also be imposed on directors of insolvent companies:

Restriction order

If an insolvent company is wound up then, unless the Director of Corporate Enforcement (DCE) relieves the liquidator from doing so, the liquidator must apply to the High Court for an order restricting each of the directors of the company from acting as a director or secretary of company for five years (a “Section 150 Order”). The Court will make the order unless the director can satisfy the Court that he has acted honestly and responsibly in relation to the company and that there is no other reason making it just and equitable to make such an order against him.  Although the Supreme Court has recently described this regime as “draconian”; and in the relevant case, lifted a restriction order that had been granted by the High Court; the statutory provisions remain unchanged.

Section 150 C.A. 1990 applies to any person who was a director of the insolvent company in question either at the date of or within 12 months prior to the commencement of its winding up. The section also applies to shadow directors.  Shadow directors are persons in accordance with whose directions or instructions the directors of a company are accustomed to act. Case law indicates that one single act or omission can result in a restriction order being imposed.

A restricted director cannot be a director of a company in the future unless that company is capitalized to just under €63,500 if a private company and to just under €317,500 if a plc..

Disqualification order

Section 160(1) C.A. 1990 provides for automatic disqualification for a period of five years or such other period as the Court may order, from acting as an auditor, director, other officer, receiver, liquidator or examiner, where a person, (i.e., not necessarily a director) is convicted on indictment of any indictable offence in relation to a company or involving fraud or dishonesty. Unlike a restriction order, the onus is on the liquidator or other applicant to show that the director’s conduct justifies a disqualification order.

In addition to the various provisions discussed above, which relate directly to insolvent companies, there are provisions where personal liability may arise under other statutory provisions if the relevant actions contributed to the insolvency of a company or were carried out when the company was not solvent. Loans to directors and financial assistance (”Section 60″) should all be approached with even more caution during the current economic difficulties.