Restriction and Disqualification of Directors
By Brian Kennedy BL
Under Irish law, there are no set qualifications required to become a director. Caselaw from the late nineteenth and early twentieth centuries suggests that the senile, the illiterate and the innumerate are all eligible to serve as directors. Furthermore, there is no minimum age requirement to serve as a director: according to the Registrar of Companies, in a small number of Irish companies, the directors are under six years old.
In such circumstances, it is hardly surprising that legislation has been enacted to protect the public from dishonest and incompetent directors. Initially, legislation provided for the disqualification of directors . The Companies Act, 1990 provided a step forward in this regard. Section 160 of the Act expanded the grounds on which directors could be disqualified. More significantly, s. 150 introduced a procedure for the restriction of directors: where a company goes into insolvent liquidation, each director will be restricted as to the type of company in which he can become involved, unless he can prove to the court that he falls within an exception, most usually that he acted honestly and responsibly.
The stated aim of the restriction procedure, which was proposed by the British Cork Committee on Insolvency Law and Practice but was never introduced in that jurisdiction, was to prevent "the Phoenix syndrome", whereby the principals of a company which became insolvent set up another one involved in the same or similar business, trade on the first company's goodwill and/or attempt to obtain its assets at an undervalue. Its application, however, was not limited to such circumstances. At the time of the entry into force of the 1990 Act, some commentators considered that the restriction procedure, coupled with the reckless trading provisions, would have a drastic impact on directors and that, in particular, experienced businesspeople would become less willing to lend their expertise as directors to newly established companies.
To date, however, the changes introduced by the 1990 Act have not had such a dramatic effect. Undoubtedly, the principal reason for this is that while s.150 was mandatory in its terms, the section did not require any party (such as a liquidator) to bring such an application. While this problem was dealt with in court liquidations by the High Court directing the liquidator to bring a restriction application, in the vast majority of voluntary liquidations, no such application was brought.
This position has been altered by the enactment of the Company Law Enforcement Act, 2001. Under s.56 of that Act, a liquidator will be required to report to the Director of Corporate Enforcement ("the Director") within six months of his appointment or the commencement of the legislation and will subsequently required to apply to the High Court for a s.150 order, unless he has been relieved by the Director of the obligation to make the application.
The significance of this change for practitioners can be gauged from the fact that there are approximately 400 new insolvent liquidations each year and that to date, very few of these have led to restriction applications. The Director has recently published a consultation paper on his liquidation related functions in which he sets out his initial views on how he plans to implement and manage the report and restriction procedure.
In this paper, I give an overview of the application of s.150 and s.160, having particular regard to caselaw and to the changes which will result from the Company Law Enforcement Act, 2001.
Restriction of Directors
(i) Scope of Restriction Provisions
The scope of application of the restriction provisions is set out in s.149 of the 1990 Act. It first provides that restriction provisions apply to insolvent companies. Insolvency can be established either by proving it to the court, at the commencement of the winding-up or during its course, or alternatively by the liquidator so certifying during the winding up.
In Carway v. Attorney General , it was asserted that the certification procedure was unconstitutional in that it provided for an irrebuttable presumption of insolvency which precluded a director from disputing the correctness of the certificate and that the company's inability to pay its debts was part of the justiciable controversy which could not be resolved by the liquidator or removed from the jurisdiction of the courts. The High Court (Carroll J.) held that there was nothing in the language of s.149 which made the certificate irrebuttable: it was merely a procedural preliminary step to the court's jurisdiction to proceed under a restriction application and that there was nothing which would prevent a director from raising any issue in relation to the insolvency of the company.
Section 154 of the 1990 Act provides that a restriction application can be brought once a receiver of the property of the company is appointed. Furthermore, under s.251 of the 1990 Act, where a company is insolvent but is not being wound up due to insufficiency of assets, an application can also be brought.
The restriction provisions apply to any person who was a director of an insolvent company at the date of or within twelve months of the commencement of its winding up.
In Carway v. A-G, the High Court held that for Chapter I to apply, the company must only be insolvent at some stage of the insolvency procedure, even if eventually the outcome of the liquidation were beneficial.
The provisions also apply to shadow directors of a company. Section 27 of the 1990 Act defines a shadow director as a person in accordance with whose directions or instructions the directors of the company are accustomed to act, unless they are accustomed so to act by reason only that they do so on advice given by a shadow director in a professional capacity.
In at least two recorded decisions, restrictions have been imposed on shadow directors. In Re Vehicle Imports Ltd , the fact that a director signed blank cheques to be filled in by another individual who allegedly controlled 75% of the business was sufficient to determine that that individual was a shadow director. In Re Gasco Ltd. , an individual who was never the a director but was a 50% and possibly a 100% shareholder beneficially and who effectively ran the company on his own following the departure of the named directors of the company was held to be a shadow director.
(ii) Section 150
Section 150(1) provides:
"The court shall, unless it is satisfied as to any of the matters specified in subsection (2), declare that a person to whom this Chapter applies shall not, for a period of five years, be appointed or act in any way, whether directly or indirectly, as a director or secretary or be concerned or take part in the promotion or formation of any company unless it meets the requirements set out in subsection (3)…."
Section 150(1) is mandatory in its terms: unless satisfied otherwise, the court shall impose a restriction. This has a number of effects. In the first place, the onus is on a director seeking to avoid restriction to prove that he acted honestly and responsibly or falls within one of the other exceptions contained in sub-section (2). Furthermore, in Duignan v. Carway (No. 2), it was emphasised that a liquidator cannot settle s.150 proceedings, or even undertake as part of an overall settlement of proceedings (e.g. for reckless trading) not to pursue the s.150 proceedings. As McCracken J. stated (at p.3): "Section 150 raises an issue between the directors and the courts and not between the directors and the liquidator".
The matters as to which a director must satisfy the court in order to avoid a restriction order being imposed, which are set out at s.150(2) are:
"(a) that the person concerned has 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 restrictions imposed by this section, or
(b) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a financial institution in connection with the giving of credit facilities to the company by such institution, provided that the institution in question has not obtained from any director of the company a personal or individual guarantee of repayment to it of the loans or other forms of credit advanced to the company, or
(c) subject to paragraph (a), that the person concerned was a director of the company solely by reason of his nomination as such by a venture capital company in connection with the purchase of, or subscription for, shares by it in the first-mentioned company."
It will be noted that paragraphs (2) (b) and (c) of s.150 are expressly stated to be subject to paragraph (a). In Re Cavan Crystal Group Ltd it was argued that this meant that it was necessary for a director to show that he had acted both honestly and responsibly even if appointed by a financial institution or venture capital company. Murphy J., while stating that it was unnecessary to base his decision on any interpretation of sub-s. (2), considered that such a construction would render paragraphs (b) and (c) meaningless and that the legislature intended that a person falling within paragraph (b) or (c) would not have to establish that he had acted honestly and responsibly.
As amended by s.41(1) of the 2001 Act, the requirements with which a company must comply for a restricted person to be a director, which are set out in s.150(3), are:
(a) the nominal value of the allotted share capital of the company shall-
(i) in the case of a public limited company, be at least £250,000,
(ii) in the case of any other company, be at least £50,000,
(b) each allotted share to an aggregate amount not less than the amount referred to in subparagraph (i) or (ii) of paragraph (a), as the case may be, shall be fully paid up, including the whole of any premium thereon, and
(c) each such allotted share and the whole of any premium thereon shall be paid for in cash.
Further restrictions are imposed on such a company. It cannot make use of the machinery under s.60 of the 1963 Act for the provision of financial assistance for the purchase of its own shares it is subject to the same restrictions under the Companies (Amendment) Act, 1983 as public limited companies in making allotments of shares other than for cash and various exceptions to the general prohibition on the making of loans and similar transactions to directors contained in ss.32-37 of the 1990 Act do not apply.
Section 150 is enforced via s.161, which makes it an offence for a restricted director to act in breach of s.150 and s. 163(3), which provides that such a director may be made personally liable for debts of the restricted company if it goes into insolvent liquidation, if the restriction provisions have not been respected. The officers of a restricted company who permit or acquiesce in a restricted director's involvement can also be made criminally liable in certain circumstances under s.164(1) and may even be held personally liable under s.165 for the company's debts in certain circumstances.
Form of Proceedings
In contrast to s.160, no specific reference is made in the Rules of the Superior Courts, 1986, as amended, to s.150. The general practice is to bring restriction applications by way of notice of motion. In Duignan v. Carway (No. 2), it was argued that there was no provision for so doing and that, accordingly, it was necessary to bring the application by way of plenary summons pursuant to Ord. 1, r. 1 of the Rules. McCracken J. noted the apparent absence of s.150 from the Rules, which he considered to be a strange omission which should possibly be rectified. He declined to make any finding on the point, on the basis that the respondents had accepted the notice of motion procedure and could not at a late stage be heard to raise a procedural objection.
In any event, having regard to Ord. 74, r.136, as inserted by Article 2(3) of S.I. 278/1991, it would appear that the notice of motion procedure is the appropriate one. Rule 136 specifically states that in any winding up, an application under any section of the Companies Acts not expressly provided for shall, in the case of a winding up by the court, be made by motion on notice and, in the case of a voluntary winding up, by originating notice of motion. Order 75B, r.7 further provides that every application brought under the Companies Act 1990 should be grounded on affidavit of the party hearing the application and should be heard and determined on affidavit unless the court orders otherwise.
A further lacuna in the Rules relates to directors who are resident outside the State. The circumstances in which service outside of jurisdiction is possible, which are set out in Order 11, do not appear to encompass a s.150 application. I understand that the general practice adopted by the High Court to overcome this hurdle is to direct an applicant to send the relevant documents to the non-resident director and to explain the nature of the procedure to the director, in particular the fact that once the applicant has established that the company was insolvent and that the respondent was a director, it is necessary for the director to establish that he falls within one of the exceptions, in order to avoid restrictions.
The issue of costs in a s.150 application is often contentious, in particular where a liquidator does not have ample funds. While on certain occasions the High Court has awarded costs to the liquidator, even if unsuccessful, in a number of recorded decisions where the restriction application has been unsuccessful, the court has ordered that each party bear its own costs. Furthermore, costs are generally measured with the result that the liquidator does not recover his full expenditure. There was no reference to costs in the legislation as enacted. Section 150(4B), however, was inserted by s.41 of the 2001 Act. It provides that the court, on hearing a s.150 application:
"may order that the directors against whom the declaration is made shall bear the costs of the application and any costs incurred by the applicant in investigating the matter."
This suggests that it is intended that the court would not have the power to make an order for costs in relation to such directors against whom no declaration is made. It remains to be seen to what extent courts will consider their general discretion in relation to costs to be fettered by this amendment. In successful applications, the provision that the director can be required to pay any costs incurred by the applicant in investigating the matter could result in a substantial liability for the director. It may, however, prove difficult to establish that costs were incurred by a liquidator in investigating the s.150 application, as opposed to the exercise of his general functions.
The question of delay in s.150 proceedings was considered in Duignan v. Carway (No. 1) . Here, a s.150 motion was re-entered some five years after it had initially been issued. In the meantime, the respondents had taken an unsuccessful constitutional challenge to the certification procedure and the liquidator had subsequently taken proceedings seeking damages against the respondents. The proceedings were re-entered less than a year after the implementation of the settlement. The respondents asserted that the proceedings should be struck out on grounds of delay.
The High Court held that it was reasonable for the liquidator to delay with the s.150 application during the period while the damages claim was being processed, on the basis that if the directors had successfully defended those proceedings, they would probably have succeeded also in resisting the s.150 application. This aspect was not appealed by the respondents to the Supreme Court. The High Court further held that the delay between the conclusion of the proceedings and the re-entry of the motion was inordinate and inexcusable but dismissed the directors' application on the basis that public interest in seeing that unsuitable persons should not be directors of companies outweighed the general prejudice suffered by the directors.
The decision was affirmed by the Supreme Court. It considered that there was a public interest represented by s.150 but that excessive delay might render it unjust to permit a liquidator to proceed with his application. While the impact of this decision will be limited once s.56 of the 2001 Act, requiring liquidators to bring an application for restriction within a limited time period unless absolved, comes into effect, one may see delay arguments being invoked frequently, in particular if liquidators of companies which have been in the liquidation process for a significant period of time are required by the Director to bring restriction applications.
The parties entitled to bring a restriction application were not detailed in the text of s.150 as originally enacted. This lacuna can probably be explained by the fact that as initiated, the Companies Bill, 1987 envisaged that a restriction would automatically be placed on a director of an insolvent company. The question of locus standi was considered in Re Steamline Ltd. , where a creditor sought to bring such an application.
Shanley J. considered that s.150 should be given a purposive construction and that it should be construed in such a way as to promote, rather than restrict, the remedy. He considered that the persons authorised under s.160(4)(b) to bring an application for a disqualification order were broadly the same category of persons who would have an interest in seeking a restriction order. Accordingly, he held that the court should construe s.150 applications as being capable of being brought by those who could bring a disqualification application, which included creditors.
Subsequently, however, s.150(4A) has been inserted by s.41(1)(c) of the Company Law Enforcement Act, 2001. It provides that an application for a restriction order may be made by the Director, a liquidator or a receiver. The insertion into s.150 of specific parties empowered to make an application for a restriction order suggests that the approach followed by the late Shanley J. in Steamline is no longer appropriate and that creditors are no longer entitled to bring such applications. In any event once liquidators are required to bring restriction applications unless absolved, it is less likely that creditors will seek to do so.
Access to Books and Records
In Carway v. A-G, the High Court held that a director who needed access to the books of the company to prepare his answer to a s.150 application could always apply to the court if obstructed by the liquidator.
(iv) Honestly and Responsibly
Relevant Time Period
The main ground on which a director can avoid restriction is by proving that he acted honestly and responsibly. In evaluating whether a director has so acted, a preliminary matter to consider is the time period which should be focussed on. In Re Gasco Ltd., McCracken J., noting that no restrictions could attach to somebody who ceased to be a director of the company more than twelve months before the winding-up, considered that this indicated that the primary aim of s.150 was to deal with directors who had behaved irresponsibly or dishonestly during the last twelve months of the life of the company and that the actions of a director subject to s.150 should be looked at primarily in the light of his actions during that period. He considered this approach to have a practical logic, as s.150 was presumably intended to focus attention on the behaviour of the directors in the period leading up to the winding up, and to try and ensure that they dealt responsibly with creditors when the company was in difficulties.
In Re Squash Ireland Ltd. , however, the Supreme Court took a different view. McGuinness J., delivering the only judgment of the court, stated that she considered that the court should look at the entire tenure of the director and not simply at the few months in the run up to liquidation. It is significant to note that on the facts of the cases, the approach taken by the court favoured the directors in each case, which is perhaps indicative of a general trend in s.150 applications to favour the director where there is any uncertainty.
To date, there are few cases in which a finding of dishonesty was made against a director. Once such case was Re Outdoor Advertising Services Ltd. Here, during the period leading up to its insolvency the company made payments to non-creditors which benefited its directors. Costello P. held that the directors had not acted honestly as they had consciously and deliberately sought to benefit themselves at the expense of the company's creditors.
In contrast, the question as to whether a director had acted responsibly has been at the heart of many of the recorded decisions under s.150. In Re Squash (Ireland) Ltd., the only Supreme Court decision considering the section, McGuinness J. emphasised that the question as to whether the directors had acted responsibly was one which must be judged by an objective standard. She continued (at p.6):
"In the case of all companies which have become insolvent it is likely that some criticisms of the directors may be made. Commercial errors may have occurred; misjudgements may well have been made; but to categorise conduct as irresponsible I feel that one must go further than this."
McGuinness J. adopted the five criteria set out by Shanley J. in La Moselle Clothing Ltd. v. Souhali to be examined to determine whether a director acted responsibly. These are:
(i) the extent to which a director has complied with the obligations imposed by the Companies Acts;
(ii) the extent to which the director's conduct could be regarded as so incompetent as to amount to irresponsibility;
(iii) the extent of the director's responsibility for the insolvency of the company;
(iv) the extent of the director's responsibility for the net deficiency in the assets of the company disclosed at the date of the winding-up or thereafter; and
(v) the extent to which the director displayed "a lack of commercial probity or want of proper standards".
In Re Squash Ireland Ltd., McGuinness J. quoted a passage from the judgment of Browne-Wilkinson V.-C. in Re Lo-Line Ltd , which had also been quoted by Shanley J. in La Moselle. Re Lo-Line Ltd concerned an application under the English Company Directors Disqualification Act, 1986 to disqualify a director on the basis that he was unfit to be a director. In considering the issue, Browne Wilkinson V.C. stated (at pp.485-6):
"What is the proper approach to deciding whether someone is unfit to be a director? The approach adopted in all the cases to which I have been referred is broadly the same. The primary purpose of the section is not to punish the individual but 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…. Ordinary commercial misjudgement is in itself not sufficient to justify disqualification. In the normal case the conduct complained of must display a lack of commercial probity, although I have no doubt that in an extreme case of gross negligence or total incompetence disqualification could be appropriate."
In La Moselle, Shanley J. restricted a director who had traded at a time when he knew the companies was insolvent and had used money due to creditors to finance his trading activities and his travel. His travel had involved trips, in one year alone when he knew the company was insolvent, to Bangkok, Ho Chi Minh City, Hanoi, Hong Kong, Seoul, Taiwan, San Francisco, Shanghai, Boston, Jamaica, Paris, New York, London and San Tropez. There was no evidence of any sales or purchases for the companies, which were involved in the clothing business, resulting from these trips. In addition to the cost of these trips, he drew significant funds from the companies: for example over £100,000 in one year at a time where cashflow was negative. Debts of associated companies were discharged without any apparent reason or justification. What Shanley J. described as a "cavalier" approach was taken to the books and records of one of the companies. The director had filed an inaccurate statement of affairs.
Books and Records
The maintenance of books and records is one of the main issues looked at by the courts in considering responsibility. In Re Costello Doors Ltd. , Murphy J. stated that the maintenance of proper books and records, in such a form so as to enable directors to make reasonable commercial decisions, and the employment of appropriate experts went a long way towards proving that a director had acted reasonably. The fact that there had been a failure to fully comply with the statutory requirement to write up books was not considered by him to be irresponsible in the circumstances. He also suggested that where a director was a substantial investor in a company and had lost money, it was less likely that he would be restricted.
In Re Gasco Ltd., McCracken J. emphasised the importance of keeping proper books and records in the last few months of a company in serious financial difficulties, if only for the purpose of collecting in as many debts as possible.
Responsibility in Context of Delegation
In Re Vehicle Imports Ltd., Murphy J. considered the responsibilities of a director where delegation takes place. Referring to the decision of the English Court of Appeal in Barings , he accepted that a degree of delegation was almost always essential if a company's business was to be carried out efficiently and that there was a clear public interest in delegation. However, once delegation had taken place, a director still retained a residual duty of supervision and control and had a duty to acquire a sufficient knowledge and understanding of the company's business to enable him to discharge his duties. Murphy J. considered it appropriate to restrict a director notwithstanding the fact that he had attempted to delegate the responsibility for the maintenance of books and records.
In Re Gasco Ltd., McCracken J. stated that when considering the application of s.150 to individual directors, regard must be had to the area of management in the company for which that director was personally responsible. This did not mean that he could disclaim responsibility altogether on the basis that financial matters, for example, were the responsibility of another director, but nevertheless a matter to be considered was whether his reliance on the actions of another director was itself responsible. A director who relied on his co-directors "with an optimism that was certainly not justified, but which perhaps was understandable" was held to have acted honestly and responsibly.
Directors with Limited Involvement
Restrictions can be imposed on directors notwithstanding their limited involvement in a company. In Re Costello Doors Ltd., Murphy J., echoing the dictum of Carroll J. in Re Hunting Lodges , stated that he did not accept that anybody who agreed to act as a director of a company could be excused from acting responsibly merely because he or she was a friend, relative or spouse of the proprietor of the company and accepted the office to facilitate the proprietor without being prepared to involve himself or herself in any aspect of the management of the company.
However, courts have in practice been more lenient to those who become directors in such circumstances. In Re Vehicle Imports Ltd, Murphy J. declined to make a restriction order against a director who was the wife of the principal director, who had taken no part in the management of the company or in relation to the maintenance of the company's records. While he emphasised that non-executive directors have duties, he noted that the wife had opposed the increased borrowing of the company. The liquidator of the company had, however, received no books of account or other company records. In such circumstances, in particular as the court pointed out that the responsibility to keep books is a joint and separate liability on each of the directors, it is arguable that the court was unduly lenient.
Similarly, in Re Ford Security Ltd., a director had been appointed to a company because at the time she was in a personal relationship with the other director. When that relationship ceased, her involvement in the company ceased. She did not, however, resign as a director. The company went into liquidation in the following year. Laffoy J. did not impose a restriction order, on the basis that she had no involvement in the final year of the company's existence. While she had not filed a statement of affairs, no serious issue had been taken on this by the liquidator.
(v) "Just and Equitable"
In La Moselle, Shanley J. noted that acting "honestly and responsibly" related to the conduct of the affairs of the company and arguably bore no relation to any period after the commencement of the winding-up or receivership of a particular company where the director may not be involved any further in the conduct of the affairs of the company. He noted, however, that a director seeking to prevent a restriction order was also obliged to satisfy the court that there was no other reason why it would be just and equitable to restrict him. He considered that this allowed the court to take into account any relevant conduct of the director after the commencement of the winding-up, for example any failure to co-operate with the liquidator.
The importance of co-operation with the liquidator is best illustrated by Carroll J.'s judgment in Re Dunleckney Ltd. . Here, the company had been wound up in October, 1991, only two months after Part VII of the 1990 Act came into operation. Carroll J. considered that she was precluded from taking into account actions of the director prior to the date when Part VII came into operation as it did not have any retrospective effect. While the director in question did not act at all in relation to the affairs of the company after s.150 came into operation, she noted that he had failed to file a statement of affairs, as required by statute and had failed to give any explanation for this failure. She considered this failure, of itself, to be sufficient to justify the imposition of the restriction.
(vi) Relief from Restriction: Section 152
Section 152 of the 1990 Act provides that a person who has been restricted under s.150 may, within twelve months of the making of the order, apply to the High Court for relief, in whole or in part, against the restrictions. The court may, if it deems it just and equitable, grant such relief on whatever terms and conditions it sees fit.
A director so applying must give a liquidator at least fourteen days' notice of his intention to make the application. On receipt of this notice, the liquidator must notify any creditors or contributories of the application.
Robinson v. Forrest is the only recorded case considering s.152. The apparent infrequency with which the section is used may stem from the fact that the application for relief must be made within one year of the making of the original order. This limitation is appears to be slightly anomalous: if any limitation were to be placed on the time at which such an application were made, it would seem more appropriate to preclude a party from bringing a s.152 application in the first part of the restriction period, rather than to require him to do so.
In Robinson v. Forrest, the applicant had paid a sum of over £200,000 to reduce the company's liabilities to its creditors. He had also started another company which was trading successfully and which employed a number of other people. The application was, however, resisted by the Revenue Commissioners. They argued that as a matter of policy, any restrictions imposed on a director should operate for a minimum period of two and a half years and that all of the debts of the company should be discharged before any relief was granted. It is perhaps difficult to reconcile the first point with the requirement that the application be brought within twelve months.
Laffoy J. granted the relief sought. She considered that the case was an exceptional one, which fell to be determined on its own peculiar facts. She noted that the application arose following the compromise of substantive proceedings before the late Shanley J. and that Shanley J., who had knowledge of the issues of law and fact arising, had seen fit to put a stay on the order under s.150 for six months and to entertain the s.152 application within that six month period. She also considered that the applicant had learnt an expensive lesson from his involvement with the company and that, accordingly, the deterrent value of the restriction would not be undermined if the restriction were lifted.
Laffoy J. also held that as a matter of practice, in all s.152 applications, the liquidator should personally swear an affidavit that he has notified all creditors and contributories of the company known to him of the receipt of the s.152 application and of its return date.
(vii) Role of the Director of Corporate Enforcement
As previously stated, s.56 of the 2001 Act introduces a requirement on the liquidator of an insolvent company to report to the Director of Corporate Enforcement. It provides:
"(1) A liquidator of an insolvent company shall, within six months after his or her appointment or the commencement of this section, whichever is the later, and at intervals as required by the Director thereafter, provide to the Director a report in the prescribed form.
(2) A liquidator of an insolvent company shall, not earlier than three months nor later than five months (or such later time as the court may allow and advises the Director) after the date on which he or she has provided to the Director a report under subsection (1), apply to the court for the restriction under section 150 of the Act of 1990 of each of the directors of the company, unless the Director has relieved the liquidator of the obligation to make such an application.
(3) A liquidator who fails to comply with subsection (1) or (2) is guilty of an offence."
The Director has published a consultation paper on his liquidation related functions, which focuses in particular on section 56. Anyone wishing to comment should do so by Friday 3rd May next.
Having regard to the amount of insolvent liquidations currently in being (approx. 2,000) and the fact that approx. 400 new insolvent liquidations are initiated every year, the Director has proposed that s.56 be commenced on a phased basis. On 1st June, 2002, the section would apply to all new liquidations and to all ongoing liquidations where the liquidator was appointed from 1st July, 2001 onwards. Provisionally the section would be extended on the 1st December, 2002, to include ongoing liquidations commenced between 1st July, 2000 and 30th June 2001 and further extended on the 1st June, 2003 to cover ongoing liquidations commenced between 1st July, 1998 and 30th June 2000. The consultation paper emphasises that it will be necessary to obtain practical experience in examining such reports before ascertaining whether such a workload is manageable.
A liquidation is considered by the Director to be ongoing unless, in the case of a court liquidation, the court has made final orders in relation to the company or, in the case of a creditors' voluntary liquidation, final meetings of creditors and members have taken place.
It should be noted that under s.56, a liquidator is required to submit a report even where the restriction application has already been made and is, in theory, required to make a s.150 application after submission of each report, although in practice the Director will only require one such application.
The liquidator must wait at least three months after the submission of his report before proceeding with a s.150 application. During this period, it is envisaged that the Director will evaluate the report and take a decision on whether a restriction application is required. The liquidator must, however, apply for a restriction order within five months of the submission of the report, unless he is relieved by the Director, although the High Court may allow additional time for the making of the application.
The consultation paper makes it clear that where there are insufficient funds in a liquidation, the Director will not subsidise the liquidator's costs. Accordingly, the liquidator required to bring an application will have to hope that it is successful and that the High Court will make an order under s150(4B) requiring the restricted person to bear the costs of the application and the liquidator's costs of investigation.
According to the Director, the purpose of the s.56 report is to distinguish circumstances of honest and responsible business failure from those where the directors knew or ought to have known that the company was insolvent or otherwise conducted the affairs of the company contrary to interests of its creditors. The draft report form which is exhibited to the consultation paper is in seven sections which are: liquidator details; company details; company directors/shadow directors; statement of affairs, accounts and report to creditors; proceedings; final report and valuation of report.
The details sought include a statement of the company's financial position, a commentary on the likely outcome of the liquidation and details of the creditors. The report will focus on the company directors and their running of the company, with a special focus on the indicators of improper conduct by one or more of the directors.
On receipt of the s.56 report, it may be evident that substantial further work is required on the part of the liquidator, before he is in a position to make a s.150 application. The consultation paper states that the Director will consider a bona fide request from liquidator to be exempted from s.56 to be afforded additional time to conclude his examination of the conduct of the company directors and, in appropriate cases, to prepare properly for a restriction application. In many cases, a period of longer than six months would be required to enable a liquidator to form a view of the directors' conduct, in particular where, for example, a shadow director is involved.
The additional time period is to be welcomed, in particular in complex liquidations. However, it would be preferable if a liquidator were to be given the facility to postpone the making of the s.150 application if he required the co-operation of the directors for the conduct of the liquidation (for example, in relation to actions against debtors). Naturally, it would be necessary that any postponement would not be for an unduly long period, having regard to the Duignan v. Carway (No. 1) judgment.
Once he receives the report, it is possible that the Director's staff will make contact with the liquidator to clarify matters in the report. The Director intends that he will advise a liquidator of whether he is to be relieved of his obligation to apply for a restriction within four months and, in 90% of the cases, within three months. Only time will tell whether these time limits are over-ambitious but they seem to be rather short.
The consultation paper list various circumstances where the liquidator is unlikely to be relieved of his obligations. These include:
(i) a suspected breach of the Companies Acts, including any failure to keep proper books of account;
(ii) where the director has placed his own interests ahead of that of the company, for example by discharging debts which he had personally guaranteed;
(iii) where the director has misapplied company property;
(iv) where the company has continued trading when it was insolvent and the director knew or ought to have known this;
(v) where there is evidence of "Phoenix syndrome" practices;
(vi) where the director has failed to co-operate with the liquidator.
The Director will also be unlikely to grant relief where there is not unequivocal evidence that the directors of the company have acted honestly and responsibly. He will consider relieving liquidators of the obligation to apply where the liquidator makes a clear and unambiguous statement, justified by reliable evidence, to the effect that the director has acted honestly and responsibly. It is not clear from the consultation paper whether the Director will require such a statement before relieving a liquidator of his obligation. While the draft report form asks the liquidator whether the directors acted honestly and responsibly, it is likely that in a significant portion of cases, a liquidator will not be in a position to give an unequivocal answer.
The Director considers that he is under no obligation to accept the liquidator's opinion or to be represented in court if he does not accept it. He considers that he may have cause to address the court on the merits of the restriction application in a minority of cases, such as where he is in possession of information relating to the director which did not form part of the s.56 report, where he wishes to endorse the liquidator's submissions in an important case or where he considers that orders additional to restriction may be warranted. To cover such situations, the Director is considering that he be made a notice party to all proceedings initiated pursuant to a s.56 report.
It is certainly arguable that it would be preferable if the Director were to take over the obligation of bringing the s.150 application, in particular as any additional costs which are not met by the director will eventually be borne indirectly by the creditors of the company, who will have already suffered as a result of the liquidation. In this regard, the views of the Company Law Review Group as to whether a state funded public interest liquidation service should be established, an issue which the Group will consider in its second report, are awaited with interest.
Disqualification of Directors
Section 160(1) of the 1990 Act provides for automatic disqualification from acting as an auditor, director, other officer, receiver, liquidator or examiner, where a person is convicted on indictment of any indictable offence in relation to a company or involving fraud or dishonesty, for a period of five years or such other period as the court may order.
Section 160(2) gives the court a discretion to disqualify a person where it is satisfied that:
(a) the person, while acting as a promoter, officer, auditor, receiver, liquidator or examiner of a company, has been guilty of any fraud in relation to the company;
(b) such person has been guilty of breach of duty;
(c) the person has been made liable for reckless trading;
(d) the conduct of the person while acting as a promoter, officer, auditor, receiver, liquidator or examiner of a company, makes him unfit to be concerned in the management of a company;
(e) in consequence of an inspectors' report, the conduct of any person makes him unfit to be concerned in the management of a company;
(f) a person has been persistently in default in relation to any provision of the Companies Acts relating to the filing or delivery of documents.
In relation to the latter, the fact that a person has been persistently in default may be conclusively proved by showing that in the preceding five years, he has been guilty of at least three defaults (i.e. has been convicted or has had a default order made against him).
As with restriction, there are extensive criminal and civil consequences where a director acts in breach of a disqualification order. A person so acting is guilty of an offence under s.161. The existing disqualification order is to be extended for ten years or such other period as the court orders. On the civil side, a company is entitled to recover any remuneration or other consideration paid to the director. The director may also be made personally liable for the company's debts in certain circumstances.
Test for Disqualification
In Business Communications v. Baxter , Murphy J. considered that s.160(2)(d) perhaps typified the grounds for disqualification, namely that a person's conduct made him unfit to be concerned in the management of a company. He stated that it was the comprehensive nature of a disqualification order which was seen as constituting an appropriately severe sentence for conduct manifestly more blameworthy than merely failing to exercise an appropriate degree of responsibility in relation to an insolvent company in liquidation, of which the person was a director. This statement was adopted by the High Court (Smyth J.) in Re CB Readymix Ltd.
In Re Newcastle Timber Ltd. McCracken J. considered the distinction between restriction and disqualification. The company in question had failed to make companies office returns, had traded while insolvent for some four years and, after it ceased to trade, had paid off trade creditors in priority to the Revenue. McCracken J. considered that two questions were appropriate, having regard to the wording of s.160(2): first, whether the actions of the directors were a breach of duty or made them unfit to be concerned in the management of the company and secondly whether, if so, he should exercise his discretion by making an order.
McCracken J. referred to the Lo-Line Motors Ltd. case (which made reference to the conduct displaying a lack of commercial probity), which he considered to set out the appropriate approach in both s.150 and s.160 cases. He had little doubt that the directors had acted incompetently and irresponsibly. However, he was not satisfied that the directors were so much in breach of their duties that they were unfit to be concerned of the management of a company, particularly in view of the undoubted discretion which he had. He was also influenced by the fact that one of the directors had subsequently been intimately concerned in the management of another company, which appeared to be trading successfully and was complying with its Revenue obligations. However, he considered the irresponsibility to be sufficient as to merit restriction, having regard in particular to the fact that the company traded insolvently for four years.
In CB Readymix Ltd., the High Court and on appeal the Supreme Court saw fit to disqualify a liquidator who had failed to act in an impartial manner, had destroyed the books and records of the company and had failed to act in the interests of the creditors, in particular the Revenue. The liquidator, who had never in fact been validly appointed, had engaged in what he styled a battle with the Revenue authorities which he considered necessary to preserve the employment of the employees of the company. Smyth J. considered that the respondent's conduct indicated that he could not be trusted to act as a liquidator, receiver or examiner in such a way as not to be a risk to creditors. Both the High Court and Supreme Court quoted Browne Wilkinson V-C's statement in Lo-Line Motors Ltd. with approval, the Supreme Court stating that it was a correct statement of the law and represented a proper approach to the application and interpretation of section 160.
In addition to disqualifying the respondent from acting as a liquidator, receiver or examiner, Smyth J. allowed him to act as an auditor, director or secretary of a company only on conditions: that he have any necessary professional qualifications, that he should not have possession of books and records and that the companies in question provide for a board of directors of at least three people. This conditional order was upheld by the Supreme Court by reference to s.160(8) which allows a court to grant relief to a person subject to a disqualification order in whole or in part.
It is significant that Browne Wilkinson V-C's statement in Lo-Line Motors Ltd., which is employed in England is employed when considering whether a director's conduct is such that he should be disqualified, is employed in this jurisdiction in order to consider whether a director should be restricted and whether a director should be disqualified. While McCracken J. distinguished between the two sanctions in Re Newcastle Timber Ltd., it is arguable that an adequate distinction is not made between the two sanctions and that, accordingly, the sanction of restriction is applied in many cases in this jurisdiction where disqualification might be more appropriate. For example, it would seem that the various wrongdoings of the director in the La Moselle case were of such cumulative gravity so as to make him unfit to be a director.
There are numerous examples of English directors being disqualified for unfitness for the sort of conduct which would lead their Irish equivalent to be at most restricted: for example, non-executive directors who were totally inactive and failed to carry out the functions expected of them have been disqualified in England. Similarly, English directors have been disqualified for persistent breaches of statutory obligations, such as the failure to submit annual accounts . Statistically, it would appear that more people are disqualified annually per head of population in the U.K. than are restricted in this jurisdiction .
Period of Disqualification
Under s.160(2), the court has the power to make a disqualification order against a person "for such period as it sees fit." In CB Readymix the High Court made use of the scales suggested by the English Court of Appeal in Re Sevenoaks Stationers (Retail) Ltd . The analogous English provisions considered in that case allow for a minimum period of disqualification of two years and a maximum period of fifteen years. The Court of Appeal endorsed the division of the potential fifteen year disqualification period into three brackets:
(i) the top bracket (over 10 years) should be reserved for particularly serious cases. These may include cases where a director who already had one period of disqualification imposed on him fell to be disqualified yet again.
(ii) the minimum bracket (2 to 5 years) should be applied where, although disqualification was mandatory, the case was, relatively, not very serious.
(iii) the middle bracket (6 to 10 years) should apply for serious cases which do not merit the top bracket.
In conclusion, it is likely that in the coming years, there will be an increase in the number of restriction applications brought before the courts. Perhaps the biggest imponderable at this stage is the proportion of cases in which the Director will absolve liquidators from bringing a s.150 application.
It is arguable that Irish legislation is at the same time both too lenient and too strict on directors. On the one hand, the fact that an honest director may subsequently have to justify his actions before the High Court in order to avoid restriction could lead him to act in an unduly defensive fashion, thereby discouraging genuine entrepreneurship and risk-taking. On the other hand, the more limited sanction of restriction has been imposed on certain directors who would seem to have been unfit to hold office. It is ironic that while restriction was introduced to combat the "Phoenix syndrome", individuals engaging in that practice would generally seem to be unfit to be directors and hence merit disqualification.
Perhaps a shift to the UK system, where disqualification is the only sanction but is imposed on unfit directors in a more systematic fashion, would benefit our business culture.