Restriction of Directors

Liquidator’s Obligations I

A liquidator is obliged to apply to make an application to the court to restrict the directors of an insolvent company unless excused from so doing by the ODCE.  The liquidator must give his views regarding whether steps should be taken to restrict or disqualify the directors, to the ODCE.

The liquidator may request the ODCE to relieve him of obligations 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 each director or restrict him. The report must specify actual or prospective proceedings against the company or its directors. The liquidator must notify ODCE of any proceedings by third parties that are relevant. He must state whether he intends sending a report to DPP.


Liquidator’s Obligations II

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.


Automatic Unless Excused

The court is to make a declaration of restriction, unless it is satisfied that the conditions set out for relief are met.  This declaration is in effect mandatory unless the director is excused.

To avoid a restriction, the director must prove that he acted honestly and responsibly in relation to the conduct of the affairs of the company, both before and after it became insolvent. He must have co-operated, when requested by the liquidator, in so far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company. There must be no other reason why it would be just and equitable that he should be restricted.

The Companies Act, 2014 amended the provisions regarding applications for the restrictions of a director. After commencement of the 2014 Act, the duties of directors are measured with reference to the specific statutory duties.  Directors must show that they acted honestly and responsibly in relation to their enumerated statutory obligations.

The requirement to cooperate with a liquidator in the case of winding up of an insolvent company was introduced by the 2014 Act.  This formalised a factor to which courts had regard to, in practice in applications for restriction.


Avoiding Restriction

A director or shadow director may avoid restriction by showing positively, that he has acted honestly and responsibly in relation to the company’s affairs. He must also show that there are no other reasons why it would be just and equitable, that he should be subject to the restrictions. This is considered with reference to a range of factors.

Dishonesty implies improper dealings with monies or assets or fraudulent trading.  In the majority of cases, dishonesty will not be an issue as a much lower standard of impropriety suffices for restriction.  Most cases turn on whether the director has acted responsibly, even if he has acted honestly.

Some actions or inactions straddle the honesty/responsibility boundary and are difficult to square with honest, responsible conduct. Non-compliance with tax filing and payment obligations are serious failings. Fraudulent trading is inherently dishonest and would lead to automatic restriction.

Reckless trading, including continuing to trade when the director knew or ought to know that the company was insolvent, which is also a ground for imposing personal liability, is also likely to lead to restriction in most cases.


Restriction Considerations

The courts have observed that the questions of director responsibility typically arise in the following context.

  • compliance with formal Companies Act obligations including recordkeeping, returns, the holding of meetings;
  • commercial management of the company in particular at the time it became insolvent;
  • compliance with director’s obligations.

The director should inform himself about the business and affairs of the company and of his own duties.  The circumstances will inform the extent and nature of the duties. Directorships involve clear responsibility, and persons who do not conform to minimum standards are likely to be restricted.

The Court looks at the entire period during which the person concerned was a director, rather than just the period immediately prior to insolvency. The following broad factors are relevant;

  • whether the director has complied with his legal obligations under the Companies Act;
  • whether the conduct is beyond incompetent and irresponsible;
  • the extent of the director’s responsibility for insolvency;
  • the extent of his responsibility for the deficiency of assets;
  • the extent to which the conduct of affairs displayed a lack of commercial probity and want of proper standards.

Negative Factors

Dealings between directors and the company for the benefit of directors and to the detriment of creditors, particularly on the eve of insolvency are unlikely to be excused. Direct dealing which is for the benefit of the director and to the detriment of the company will be difficult to justify.

Dealings with related companies, in which the director has a direct or indirect interest may be difficult to justify. This may include transferring assets to such related companies, discharging debts due to them before other creditors, lending monies to a related company and creating security in their favour without a corresponding benefit.

Breaches of the Companies Act, including failing to hold meetings and failure or delay in making CRO returns indicate a lack of responsibility. The failure to keep proper books of accounts and records is a serious breach of the Companies Act and undermines the basis of the company’s separate legal identity, and hinders the winding up of the company.

Substantive failures in running and managing the company may be irresponsible, even if not fraudulent or reckless. The may include accruing significant liabilities, under capitalisation of the company and improvident transactions.

The failure to co-operate with the liquidator is a negative factor and has been recognised as a specific ground for restriction under the 2014 Act.


Director’s Position

The focus in a restriction application is on each director individually. The director may not turn a blind eye nor close his eyes. Delegation is not an excuse. The failure to monitor and take an active part, where required, is a failing in itself.

The director has a general obligation to keep himself informed of the company’s affairs, financial and non-financial. Placing undue reliance on another director in relation to the affairs of the company is itself irresponsible.

The failure by the director to keep himself informed of the financial affairs and business of the company is a serious shortcoming.The courts look unfavourably on failures to recognise and remedy a deteriorating financial situation. The absence of systems to collect and analyse financial information is not accepted as an excuse.

The failure to distinguish between the affairs of different group companies may be an adverse factor. Each group member is a separate company and should be managed separately.  Even if the director has limited control or discretion, he should still take decisions and consider transactions from the perspective of the subsidiary company, of which he is a director.

The policies of the group may be followed, to the extent that this is consistent with the company’s interests. HHowever, decision-making must not be abdicated to group policy.


Non-Executive Directors

Non-executive directors must be conscious that they cannot be cyphers or purveyors of votes at the whim of management.

In considering whether a nonexecutive director has acted responsibly, the court recognises, that in general non-executive directors may rely on the executive directors carrying out what might be considered to be normal management functions. There may be circumstances which should put a non-executive director on notice that he should not continue to rely on the information provided by the executive directors and on their duties being properly performed so that he should take further steps,

Earlier cases on restriction suggested that some allowance should be made for a nominee passive non-participating director, typically a spouse or relative of the managing shareholder/director appointed to make up the statutory minimum of two directors. Even in these cases, the courts did not condone inaction and willful blindness to the mismanagement of the company.

More recent cases have shown less sympathy for the passive second / nominee director. It appears that they are likely to be held to the same standards as other directors.


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