Restrictions on Directors of Insolvent Companies

Receivers and Voluntary Liquidators should note further guidelines, on the restriction of directors, which were issued in two recent High Court decisions.

The Court indicated that Receivers and Voluntary Liquidators may not be sufficiently conscious of these provisions or may not see it as their function to bring cases before the Court and that it might be necessary to introduce a sanction to ensure that the many cases which have arisen since August 1991 are pursued to avoid apparent injustice to directors of insolvent companies wound up by the Court as opposed to voluntarily. In court liquidations, it is now established practice that the liquidator brings the question of whether or not directors should be restricted to the attention of the Court early in the liquidation.

In order to obtain an exemption from the restriction provisions, all that is required is that directors show that they have undertake a suitable degree of responsibility. This involves compliance with the requirements of the Companies Acts and maintenance of records which may be of a basic form and modest appearance but which must enable directors to make decisions and auditors or liquidators to follow them. Engaging appropriate experts is also relevant.

The Court held that the normal directors' duties and responsibilities cannot be reduced simply because a director is a spouse, friend or relative of a proprietor of a company and has agreed to act as a director to facilitate that proprietor. The Court also commented that the most important feature of these provisions is that they effectively impose a burden on directors to establish that the insolvency of a company occurred in circumstances in which no blame attaches to them as a result of either dishonesty or irresponsibility.

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.