Ireland: Directors In The Dock – Restrictions And Disqualification

Last Updated: 15 May 2008
Article by John Doyle
Most Read Contributor in Ireland, September 2019

1. Introduction

The culture of corporate enforcement has become a very real issue for directors. In the last two years in particular there has been an increase in the number of directors who have found themselves in the High Court facing applications to restrict or disqualify them for various breaches of the Companies Acts or their general duties as directors. A restriction or disqualification order obviously has extremely serious implications for a director and any company they are involved in. This article looks at the two relevant sections of the Companies Acts and the approach taken by the Courts.

The Company Law Enforcement Act 2001 requires a liquidator of an insolvent company to report to the Director of Corporate Enforcement and then to apply to the High Court for the restriction of each of the directors of the company, unless the Director of Corporate Enforcement has relieved the liquidator of the obligation to apply. If a liquidator does not do so he is guilty of an offence. The provisions relating to liquidators apply equally to receivers. Therefore, the likelihood of directors appearing in Court has increased significantly.

2. Restrictions

Section 150 of the Companies Act 1990 ("the Act") allows the Director of Corporate Enforcement, a liquidator or a receiver to apply to have a person who was a director or shadow director of an insolvent company within 12 months prior to its winding up, restricted from being appointed or acting in any way, whether directly or indirectly, as a director or secretary or being concerned or taking part in the promotion or formation of any company unless that company meets certain requirements relating to share capital. The names of restricted directors are kept in a register maintained in the High Court.

This does not apply where a person was a director simply because he was nominated by a financial institution as part of a credit facility (provided that the financial institution has not obtained a personal guarantee from a director of the company) or where a person is a director as nominee for a venture capital company in connection with a share purchase.

The application is based on an affidavit sworn by the liquidator setting out all the facts he considers should be brought to the attention of the Court for the purpose of determining whether the director has acted honestly or responsibly in relation to the conduct of the affairs of the company or whether there is any other reason for which it would be just and equitable to restrict the director. If the director wishes to contest the application, he must file an affidavit setting out his reasons for contesting the application.

3. Mandatory Period

The Court must impose a five year restriction unless the director can convince the Court that he acted honestly and responsibly in relation to the conduct of the affairs of the company and that there is no other reason why it would be just and equitable that he should be subject to the restriction. The onus of establishing that he acted responsibly rests on the director. The Court has total discretion in respect of ordering any party to pay costs and in some cases may make no order so that all sides pay their own costs which could mean that a director who successfully defends an application may still have to pay his own costs. Where a restriction order is made the director may have to pay not only the costs of the application but also any costs incurred by the liquidator in investigating the matter. In some cases the Court has ordered a director to pay the costs but has measured the level of costs at a figure significantly less than the actual costs.

It is important to bear in mind that the principal purpose of the Act is to protect the public against the future conduct of companies by persons whose past record as directors of insolvent companies has shown them to be a danger to creditors and others, rather than to punish the individual director. If a liquidator or a receiver believes that the interests of a company or its creditors are being put at risk due to the fact that a restricted director is acting directly or indirectly as a director or is taking part in the promotion or formation of that company then he must inform the Court immediately and if he fails to do so he is guilty of an offence.

4. The Courts' Approach

While some of the cases which have come before the Courts have involved dishonesty, this is not always the case and the Courts are frequently asked to decide whether a director acted responsibly. While each case will be decided on its own circumstances, it is possible to distil from the decisions a scheme or set of criteria against which the conduct of directors will be assessed.

For a restriction order to be made the conduct would need to go beyond simply making bad commercial decisions and would have to tend towards gross negligence or incompetence. The Courts will require the liquidator to show a lack of commercial probity on the part of the director. While, by definition, a director's actions will be scrutinised with the benefit of hindsight, Judges are keenly aware of the dangers this creates.

In deciding these cases, the Court will examine the extent to which a director has complied with the obligations imposed by the Companies Acts or under the law generally. An important factor in this regard would be the extent to which there were proper books and records so as to enable the liquidator to investigate the affairs of the company.

The Court would consider whether the director's conduct could be regarded as so incompetent as to amount to irresponsibility and the extent of the director's responsibility for the insolvency of the company or the deficiency in assets disclosed at the date of the winding up or thereafter. It would not be sufficient for a director to say that these were the responsibility of his co-directors and that he presumed that all was being attended to. Each director has a personal duty to act responsibly, with his fellow directors and must satisfy himself with certainty that proper books and records are being kept and that the company's affairs are being properly supervised and controlled. This may be delegated to suitably senior staff but the director himself must be sure that all matters of that kind are looked after and being attended to as required.

A restricted director may within not more than one year after a declaration has been made, apply to the Court for relief from some or all of the restriction. If a director intends to apply, he must notify the liquidator (if any) of the insolvent company and the liquidator must immediately notify such creditors and contributories of the company about the application. The liquidator or any creditor or contributory of the company may appear and give evidence. A question for the liquidator in considering whether to participate in such applications is whether the costs associated with participating can be justified, particularly to creditors.

If relief is granted the register of restrictions will be amended accordingly. Particulars of restrictions are removed from the register after five years.

5. Disqualification

In addition to the provisions of Section 150, directors need also be aware of the possibility of an application being brought under Section 160 which would seek a disqualification. A disqualified person could not act as an auditor, director or other officer, receiver, liquidator or examiner or be concerned in any way, directly or indirectly in the promotion, formation or management of any Company. Section 160 applies where a person is convicted of an indictable offence in relation to a company or involving fraud or dishonesty. There are other specific incidences which may trigger an application for a disqualification order. These essentially involve allegations of serious wrong-doing by a director which would render him unfit to be concerned in the management of a Company.

There have been a number of applications under Section 160 which have arisen out of reports of Courtappointed inspectors. The most notable examples are applications arising from the Ansbacher Report and the Report of the Inspectors into NIB. Some of these are still presently before the Court. In two of these cases which have been decided the directors did not contest the applications. However, those cases give a clear indication of the approach to be taken by the Court. Again the main purpose of the section is the protection of the public rather than punishment of the director. However, the Courts recognise the serious implications for the individual director and will approach the case so as to protect the right of the director to a full and fair hearing.

A difficulty which can arise is that the application to restrict may be made many years after the events have happened and in some cases directors may argue that they are hampered in their defence by the unavailability of witnesses or other evidence. In such cases the Court will have to consider whether justice can be done if the case is to go ahead.

The onus of proof in disqualification cases is on the applicant and not the director even where the director consents the applicant still has to establish the facts. The Court has a discretion about the 160 Order but not the 150 Order.

If a Court decides to disqualify a director it will then have to consider the appropriate duration of the disqualification. There are no minimum or maximum periods in the Act and a Judge could decide to restrict under Section 150 rather than disqualify under Section 160.

The Courts recognise the need to have a deterrent effect and will want the period of disqualification to reflect the seriousness of the misconduct and will take into account any mitigating factors on the director's behalf. The trend emerging from recent cases is that the period of disqualification is likely to be in excess of five years but not more than ten years except in the most serious cases. The Court is likely to take account of whether the director admitted the misconduct and the attitude he adopted in the course of the case. The Court will not usually get involved in examining the periods imposed in other cases since each particular case should be judged on its own particular facts.

6. Conclusion

As can be seen, the Courts have shown a willingness to support the aims of the Company Law Enforcement Act 2001 and in addition the Director of Corporate Enforcement has reported a very significant increase in the number of disqualification orders made, up to 21 in 2005 from only 3 in 2004. The ODCE is seeking to increase its staff and to target new areas for compliance and enforcement. Directors need to be aware of the onerous duties imposed on them and they need to take all possible steps to conform to the acceptable standard. The responsibility is personal and directors need to be vigilant to protect the interests of their company and thereby to protect their own interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions