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Restriction and Disqualification of Directors in Ireland who fail to close a company correctly

Company Bureau Formations
02 August, 2019

The law regarding restriction and disqualification of directors was introduced in Ireland in the 1990s as a deterrent against misconduct and to protect the public. The need to restrict or disqualify directors was felt after too many instances of directors re-emerging from insolvent companies with new corporate identities. In the past, too many directors failed to close a company correctly, allowing the company to go into liquidation or to be struck off the register. Previously, there were no consequences for not closing a company properly. This article explores the restriction and disqualification that directors now face as defined by Part 14 of the Companies Act 2014.

Restriction of Directors

The courts in Ireland have the power to restrict a director following their involvement with an insolvent company in liquidation or receivership. The court may be approached by a liquidator, receiver or Director of Corporate Enforcement. When a director fails to satisfy the court of their managerial integrity during their directorship, the court may restrict the individual from acting as a company director for up to 5 years.

The onus is on the director to satisfy the court that he/she acted honestly and responsibly in relation to the conduct of the company's affairs and that he/she co-operated reasonably with the liquidator. The law regarding restriction also applies to shadow directors and de facto directors and includes anyone who was a director at, or within the 12-month period before, winding up or receivership.

This ramification is intended to avoid an abuse of the concept of separate legal personality and limited liability whereby a person winds up an insolvent company owing large debts and shortly afterwards starts up another company without ever having to make good the debts of the first company – a process historically known as "phoenix trading".

This deterrent is intended to stop the abuse of limited liability that otherwise would allow a person to abandon an insolvent company with large debts and shortly afterwards incorporate a new company without having to make good on the debts of the first company. Historically, this type of action has been known as "phoenix trading."

The consequences of restriction are strict rules being applied to the individual if they wish to become a director or secretary of an Irish company or be involved in the formation or promotion of an Irish company. The company must have an allotted share capital of nominal value not less than EUR500,000 in the case of a public limited company, or EUR100,000 in the case of any other company. All shares must be fully paid up. The restriction is an expensive consequence for a director who finds themselves in this situation.

Disqualification of Directors

This ramification is more burdensome to a director than restriction. This means the director cannot be appointed or act as an auditor, director or other officer, liquidator or receiver, or in any other way take part in the promotion, formation or management of any Irish company for a period of time decided by the Court. A director would be disqualified if he or she is convicted on indictment of an offence in relation to a company or an offence involving fraud or dishonesty.

Unlike restriction, disqualification can occur regardless of the company's capitalisation and an application for disqualification can be made by Director of Corporate Enforcement, the Director of Public Prosecutions, a shareholder, a creditor, an employee, an officer of the company, a receiver or a liquidator.

In order to avoid being restricted or disqualified, all company directors must be familiar with the duties and responsibilities attached to their appointment of directors of Irish companies and must apply them in all decisions relating to the company and of course, act honestly and responsibly. It is also important that a director has the right support in running their company such as employing a company secretarial agent, an accountant and a solicitor where required.


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Company Bureau Formations

Company Bureau Formations is Ireland's leading Company Formation, Company Secretarial and Corporate Service Provider. www.companyformations.ie

 

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