Restriction Process

Restriction and Disqualification

Directors may be subject to restriction or disqualification if they are found not to have met minimum standards in the conduct of the company’s affairs. The provisions in relation to restriction and disqualification apply both to directors and to persons who are in effect directors, although not formally appointed. Once restricted or disqualified, it is a serious offence to act in breach of the restriction or disqualification.

Unless the ODCE otherwise permits, the liquidator must apply to have the directors of an insolvent company restricted. The restriction is generally for five years. The court must make the declaration unless it is satisfied that the director has acted responsibly in relation to the conduct of the affairs of the company and there is no other reason why it is just and equitable that he should be subject to disqualification or to the restrictions.

The provisions of the Companies Act in relation to restrictions applies when a receiver is appointed over all or substantially all the assets of the company.  The provisions apply as if references in the legislation, to the liquidator and to winding up were references to the receiver and to receivership.

Where a director is restricted, he must not be involved, directly or indirectly in a company other than one with not less than a specified amount of paid-up capital. Breach is an offence. It is also a ground for disqualification or extension of an existing disqualification. He may be made liable for the debts of the under-capitalised company, as may other directors who knew, or should have known of the restriction.


Liquidator Obligations I

The liquidator is obliged to make an application to the court to restrict the directors unless excused from so doing by the ODCE. Liquidators bring the majority of restriction applications. The liquidator may apply to the ODCE to be relieved of the obligation to bring restriction proceedings. He must give his views regarding whether steps should be taken to restrict or disqualify directors.

The liquidator may request the ODCE to relieve him of the obligation to apply to restrict a director.  He must state the names of the directors and the grounds on which he believes they should not be restricted.

The liquidator must state whether he is applying to disqualify the director or restrict him. The report must specify any actual or prospective proceedings against the company or its directors. The liquidator must notify ODCE of proceedings by third parties that are relevant.


Liquidator Obligations II

He must state whether he intends sending a report to DPP.  In a court-ordered liquidation, the court can refer matters to the DPP.  The liquidator in a voluntary liquidation can refer suspected offences.  The court can direct a liquidator to refer suspected offences to the DPP and the ODCE.

The liquidator must send a report to the DPP if it appears that any past or present director or member has committed an offence for which criminal liability attaches.  If the liquidator does not do so, the court can direct the liquidator to make the report.

The liquidator must assist the DPP and ODCE in relation to the consideration of a prosecution. The ODCE is the investigative body.  The DPP does not investigate.  It considers whether there is appropriate evidence for a criminal prosecution.


Restriction Order I

The standard order of restriction provides that the former director (or other officer) shall not for five years be appointed or act in any way, directly or indirectly, as a director (or other officer etc.)  of a company unless the statutory capitalisation requirements have been complied with.

The order for restrictions shall be made unless the court is satisfied that

  • the person concerned has acted honestly and responsibly in relation to the conduct of the company’s affairs, both before and after it became an insolvent company;
  • he has when requested by the liquidator, cooperated insofar as could reasonably be expected in relation to the conduct of winding up of an insolvent company; and
  • there are no other reasons why it is just and equitable that he should be the subject of restrictions.

An application for a declaration may be made by the ODCE, a liquidator of an insolvent company or the receiver of the property of the company.  The court may order that the person, who is the subject of the declaration, shall pay the cost or such other costs, including the costs of investigation and collecting evidence, as the court may direct.


Restriction Order II

If a liquidator of an insolvent company is of the opinion that a restricted person is appointed or is acting in a way whether directly or indirectly as a director or is concerned in the formation of another company and the interests of that other company or its creditors may be jeopardised, he shall inform the court of his opinion as soon as practicable.  The court shall make such order as it considers appropriate.  A liquidator who fails or refuses to comply with this obligation, without reasonable cause, is guilty of a category 3 offence.

The Companies Registration Office (CRO) is to maintain a register of restricted persons.  Where relief from restriction is given, the particulars of relief are to be entered in the register. Where full relief is granted, the restricted person shall be removed from the register.  The CRO shall remove from the register, particulars of restricted persons on the expiry of five years from the declaration of restriction.


Restriction Undertakings

The 2014 Act made provision for restriction and disqualification undertakings. A restriction undertaking has the same effect as a declaration of restriction.The person concerned is deemed to be subject to a restriction declaration.

Where the restriction undertaking is given, neither the Director or other persons aware of it shall make restriction application.  The Director shall cause the restriction undertaking to be registered and furnish a copy to the person concerned.  No other person shall make an application for restriction in respect of the same facts and circumstances.

During the period of the restriction undertaking, the same restrictions that apply to a restriction order, apply to the restricted person.  The person who has given the restriction undertaking shall not be appointed in any way directly or indirectly as the director or secretary of a company or be concerned in or take part in the promotion or formation of a company unless the company meets the requisite capitalisation requirements.

Where a person has already given a restriction undertaking or who is already restricted, the period specified in the undertaking shall run concurrently with the remaining period for which the person is subject to a restriction.


Undertaking Procedure I

Where the ODCE has grounds for believing that a person is or was the director of an insolvent company, it may deliver a restriction notice. The restriction notice is in a prescribed form. It states the circumstances, facts and allegations giving rise to the ODCE’s belief that the grounds for restriction apply to the director concerned. The director is effectively requested to accept the restriction. The undertaking may not be sought if an application has been made.

The restriction notice states the date on which the restriction will come into effect if accepted.  There is a period of at least 21 days (which may be extended) during which the director is to notify the ODCE of his willingness to give the restriction undertaking, thereby accepting the restriction.

During this period, the ODCE must refrain from making an application in relation to the underlying facts and circumstances.  Other officers such as the liquidator,  who are aware of the notice, must not apply for restriction during this period.


Undertaking Procedure II

If the person gives the requested undertaking, no person may apply for a restriction.If a restriction notice is given, the ODCE is to furnish the particulars to the CRO for entry on the register of restricted persons.  It is to issue a document accepting the restriction. A person who was given a restriction undertaking is deemed to be subject to a restriction declaration.

The person who has given the restriction undertaking may seek to be relieved in whole or in part from the undertaking, by applying to the court.  The court may grant such relief as it considers just and equitable, on such terms as it sees fit. Where a person who has given the restriction undertaking is already restricted, the period specified in the intermediate undertaking is to run concurrently with the remaining period.


Liquidator’s Report I

A liquidator of an insolvent company must within six months of his appointment provide the ODCE with a report in a prescribed format which requires certain specified information about the conduct of the company by the directors.

The purpose of the report is to identify and distinguish between honest, reasonable business failure and cases where the directors were at fault in some respect. In particular, it seeks to identify cases where the directors knew or should have known that the company was insolvent and were conducting its affairs in a manner which was contrary to the interests of the creditors and the general public interest.

The report is divided into a number of parts:

  • liquidators details;
  • company details – this includes information regarding the business trading address, the number of employees, accounts, activities and details of past insolvency;
  • company directors – this requires details of persons who were directors within 12 months before the commencement of winding up.

A statement must be included, where a director has demonstrated to the liquidator that he has acted honestly, reasonably and responsibly in connection the conduct of the company’s affairs. The statement must be accompanied by particulars which support the conclusion reached by the liquidator.  The liquidator must reach his opinion based on his investigations.


Liquidator’s Report II

A further part of the report is intended for use in follow-up reports.  The information to be presented is that based on the culmination of the above-mentioned proceedings. At the end of every report filed, the liquidator must make a statement that the contents of the report are true.

The liquidator must state whether there is a material difference between the statement of affairs and the expected final position.  The liquidator must state whether there has been any material transfer of assets within the last 12 months prior to the commencement of winding up.  Details must be furnished.  This may involve such matters as transfers to directors or persons connected with them and dispositions which may be subject to being set aside, such as fraudulent preferences or fraudulent dispositions.

A liquidator must file further reports at intervals, as may be required by the ODCE.  Their content will depend on what information and proposals are contained in the initial report.  It is an offence for a liquidator to fail to make the requisite return, subject to prosecution, court order or administrative penalty.


ODCE Review I

The ODCE takes account of the facts and circumstances relied on by the liquidator in deciding whether or not to seek to restrict the director. It takes account of the liquidator’s opinion but is not bound by it. Guidance notes suggest that the following are relevant

  • commissions of breaches of the Companies Act, including the failure to keep accounts;
  • placing personal interests ahead of those of the company;
  • purchasing company assets below market value, particularly when its position was fragile;
  • misapplication or retention of the company’s monies or assets;
  • continuing to trade while insolvent or when he ought to have known that the company was insolvent;
  • continuing to trade without a reasonable prospect of paying creditors’ claims;
  • evidence of a phoenix company practices such a selective discharge of debts
  • failures to co-operate;
  • evidence of undervaluing or overvaluing transactions,

ODCE Review II

Also relevant in the review of the liquidator’s report by the ODCE are false statements including those in

  • the directors’ statement of affairs;
  • audited accounts;
  • management accounts after last audited accounts;
  • reports to creditors;
  • minutes of creditors’ meetings;
  • chairperson’s statement to the creditors’ meeting;
  • other relevant documents.

Restriction Applications I

If the liquidation is insolvent, the onus is on the director concerned to show his responsibility, honesty and diligence in managing the affairs company. A restriction application cannot be settled in the same manner as a civil case.

The liquidator of an insolvent company must bring restriction proceedings against persons who have been directors or shadow directors within 12 months of commencement of the insolvency process unless the ODCE relieves him of the obligation.  The provisions apply to shadow directors.  A shadow director is a person who acts as a director, although not formally appointed as such.

The only burden of proof is on the applicant for the restriction is that the company was insolvent on winding up and that the person the subject of the application, was a director a shadow director within previous 12 months.

The burden is then on the person who is the subject of the application, to show that he acted honestly and responsibly, in the conduct of the affairs of the company and that there is no other reason why it would be just and equitable to make a restriction declaration.


Restriction Applications II

The application for restriction can be made against non-resident directors.  It applies to all directors, executive or non-executive.  Non-executive directors, of their nature, will have a different role. More will be required of and executive director

The courts have general discretion in relation to the costs of restriction applications.  The directors concerned may be ordered to bear the costs or part of them.  The costs include the cost of the investigation.  The director may be liable to pay the costs of the investigation and the legal applications.

The Court may order the director against whom a declaration is made, to pay the costs.  A contribution may be ordered, even if the declaration of restriction is conditional.  If the application fails, the liquidator is liable for the costs.


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)     Courtney

Keane on Company Law 5th Ed. (2016) Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law