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Honest or Dishonest, Responsible or Reckless: The Divergence of Restriction and Disqualification Orders

  • Ireland
  • Other

21-02-2022

A question that often arises is what the consequences are for directors who fail to discharge their statutory duties under the Companies Act 2014 (the “2014 Act”). While there are several consequences, depending on the seriousness of the misconduct in question, perhaps the most serious are the possible imposition of restriction or disqualification orders on those directors concerned.

Restriction and disqualification orders are brought under S.819 and S.842 of the 2014 Act respectively. A restriction order is brought against any individual who was a director of a company at the time it became insolvent but that does not necessarily mean a restriction order will be imposed. Disqualification orders are usually sought and reserved for more serious instances of misconduct.

The divergence in the criteria in restriction and disqualification orders as well as the distinction in the onus and proofs required in respect of the two was recently considered by the High Court in Meridian Motors Limited (In Liquidation) v Companies Act 2014. Before considering the outcome in this case, it is useful to have regard to the differences between what can give rise to a restriction order as compared with a disqualification order.

Restriction orders

The following persons have Locus Standi to bring restriction applications before the Courts;

• The Director of Corporate Enforcement;

• The liquidator of an insolvent company; or

• The receiver of the property of a company.

A liquidator of an insolvent company has an obligation to bring a restriction application unless the Director of Corporate Enforcement instructs them otherwise. Those persons that can be restricted are directors (including non-executive directors) and shadow directors of the company in question at the date of, or within 12 months of the commencement of the winding up. De facto directors may also be subject to restriction orders as was examined in Re Toy Traders; Gray v McLoughlin where it was held that a person who was not validly appointed as a director may nevertheless be amenable to restriction where it was proved that he was a de facto director.

Where an individual is restricted, that person cannot act as an officer, nor be involved in the promotion or formation of a company during a period of up to 5 years unless it is adequately capitalised, that capital being €500,000 of paid up share capital in the case of a public company or €100,000 of paid up share capital in the case of any other company.

In the case of restriction, the Courts can make a declaration of restriction against a director unless the Court can be satisfied that;

• The person concerned acted honestly and responsibly in relation to the conduct of the affairs of the company in question;

• When requested to do so, the person concerned cooperated with the liquidator in relation to the conduct of the winding up; and

• There is no other reason why it would be just and equitable to impose a restriction order.

When looking at the terms “honestly” and “responsibly” they should be taken as two separate and distinct criteria. When imposing a restriction order, usually dishonesty is easier to prove, whereas establishing the level of irresponsibility is more difficult and, as in a number of cases that have come before the courts in recent years1, the court will have regard to five factors, being;

1. The extent to which a director has (or has not) complied with his statutory obligations under the 2014 Act;

2. The extent to which his conduct could be regarded as so incompetent it amounts to irresponsibility;

3. The extent to which a director is responsible for the company’s insolvent state;

4. The extent of the director’s responsibility for the deficiency in the company’s assets at the time of winding up; and

5. The extent to which a director has displayed a lack of commercial probity in the conduct of the affairs of the company.

Disqualification Orders

A disqualification order by the Court means the person concerned shall be disqualified from acting as director or other officer or being in any way, whether directly or indirectly involved in the promotion, formation or management of a company where it has been found that;

• The director has been guilty of any fraud in relation to the company, its members or creditors;

• The director has been guilty of a breach of any of his/her duties;

• The director engaged in reckless or fraudulent trading;

• The director’s conduct makes him/her unfit to be involved in the management of a company (for example persistently in default of statutory filings or failing to keep proper books of account); and/or

• The director is disqualified under the law of another state and it would have been proper to make a disqualification order against the person if his/her conduct or the circumstances that gave rise to the disqualification had occurred or arisen in the state.

Unlike restriction orders, disqualification orders are not mandatory even if one of the grounds is made out. With restriction, the burden falls on the director to satisfy the Court that he/she should not be subject to a restriction order. In the case of disqualification, the burden is reversed and there is a substantial burden for the applicant to discharge in order for a Court to make an order for disqualification.

The Courts, in a number of cases, have made clear the criteria to be considered when making a disqualification order;

Harman J in Re Cladrose Ltd: the power to disqualify was a power to be exercised to protect the public against those who displayed a lack of commercial probity, rip off the public (in colloquial terms), or otherwise shelter a totally rash and unjustified venture behind the shield of limited liability so that they themselves do not suffer… but leave the creditors at large to suffer.

Murphy J in Re CB Readymix Ltd adopted a passage from an English decision where it was stated; 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 have shown them to be a danger to creditors and others… ordinary 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 would be appropriate.

Meridian Motors Limited (In Liquidation) v Companies Act 2014

In this recent case, the applicant (the liquidator of the company) brought an application for disqualification against the respondents, being the directors of the company. Despite the applicant identifying multiple “issues of concern” including inter-alia the alleged theft of vehicles, VAT fraud, falsification of invoices, failing to keep proper books of account, trading whilst insolvent and unfair preference in favour of a related party, the applicant failed to discharge the onus of proof to ground an order for disqualification.

It was held that, for a disqualification order to succeed, it is not sufficient to simply identify “issues of concern”, however serious they may be and where an applicant applies for a disqualification order, it is incumbent on them to identify the provisions within s.842 they invoke, and adduce evidence to prove the relevant ground. The “issues of concern” raised were, however, sufficient for the imposition of a restriction order for a period of 5 years on each of the respondents.

Your obligations

Our Company Secretarial Team at Eversheds Sutherland are highly skilled and experienced, particularly in dealing with the statutory obligations of directors. If you require any assistance in this regard or indeed with any aspect of your company secretarial requirements, please contact a member of the team.

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La Moselle Clothing Ltd, as approved by McGuinness J in Re Squash Ireland Ltd