Company Law Restriction Notes

RESTRICTION OF DIRECTORS • • • •What happens if a director fails in their duty Company law notes part four. Since the 2014 act A company need only have one director Prior to this it was two. You can only be the director of 25 companies ltd by shares at once. What's a director? "any person occupying the position of director by whatever name called." • • • • Not very specific, but important as there are statutory consequences placed on directors, and if you are not a director, you can't be so punished. The fact that you call yourself something other than a director is not a loophole to evade the potential adverse consequences Sometimes there are 'shadow directors' - people who avoid being formally appointed as a director. In effect, they ARE managing the company. Director du jour…formally appointed. What's a shadow director? "a person in accordance with whose directions or instructions the directors of a company are accustomed to act…unless the directors are accustomed so to act by reason only that they do so on advice given by him in a professional capacity." • • Once a company is implementing your directions and instructions you are a shadow director and the consequences may apply to you, as well. Exceptions are other associates of a company that is giving advice or directions e.g. an accountant or a solicitor…you are not a director, despite the fact your instructions and directions are followed by directors. What's a de facto director? • • • Can be distinct from a shadow director De factor directors claim or purport to act as a director, but some formality remains unfulfilled. Not formally appointed Executive and Non-Executive directors? Executive: • • The day-to-day running of a company is conducted by them Will often have a contract of employment w/ the company. Non-Executive • • • • Not actively involved in the day to day running Usually appointed because of some expertise in a particular area Only generally attend board meetings where their experience is required. For business contacts, for their profile, for their expertise or specific knowledge • Often retired and has a lot of experience in such area. The phoenix syndrome. • • • • • • • • • People would set up a company, which then failed, and the directors could walk away from the failed company. Due to legal personality, they were not personally responsible for the debts - received no adverse consequences Legislation passed in 1990 which provided sanctions for this conduct. 2 in particular that're relevant: restriction and disqualification. To prevent scrupulous director's from reaping the benefits of incorporation. When a company fails, it's usually when its debts exceeds its assets So, creditors will get less than owed Some creditors could have security which will give them some or all money back However, unsecured creditors will get little or nothing. This was happening all the time. 1. RESTRICTION • • Case law shows that the primary purpose of restriction is not in fact punishment. Instead, it is to protect the public. There are 2 significant cases always quoted to illustrate this principle. Re Lo-Line Motors 1988 VC wilkinson"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 a director of insolvent companies have shown them to be a danger to creditors and others... Retroactively protecting creditors against scrupulous directors. Odd that this is explicitly said…but says primary purpose meaning there are other purposes behind it.Ordinarily commercial mismanagement 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." Probity - strong morals, honesty, decency. La Moselle Clothing v Soualhi 1998"the protection of the public from persons who, by their conduct, have shown themselves unfit to hold the office of, and discharge the duties of, a director of a company and, in consequence, represents a danger to potential investors and traders dealing with such companies." ➢ If a company fails, this does not mean that a director is automatically restricted. The reality is that businesses fail all the time, where directors have fulfilled their duties thoroughly. ➢ It is ONLY to protect creditors against ^ extreme gross negligence, total incompetence, lack of commercial honesty or morality. (Lo-Line) ➢ 'ordinarily commercial mismanagement' not sufficient. Business Communications v Baxter 1995 IrishThere must be no 'witch hunt' because the business failed as businesses will." This is where the primary purpose becomes evident - not punishment, protection of public. The process:Liquidator usually brings the application for restriction. This is just to restrict him from acting as a director. Issues: • • • • • • It's an inconvenience/ hassle It's costly. If a company is in liquidation, they don't have much resources In theory a costs order can be made against director but if they don't have assets it's not very effective Consequently, these restriction orders weren't generally made. Instead, sell the company and get as much assets possible to repay creditors. NOW under the act:A liquidator of an insolvent company must apply to the court unless the director has relieved the liquidator of this obligation. • • They don't have a choice unless relieved by director of corporate enforcement If they don't bring the application:They are committing an offence. STATUTORY PROVISIONS: • • • • Often the starting point, as the act consolidates case law in effect. It also brought all of the company law legislation into one act - by far the longest legislation ever passed in Ireland This means that all the provisions, even though some of them pre-date the 2014 act, they were re-numbered This is significant because restriction orders used to be known as section 150 applications, relevant to their section pre-the 2014 act.

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