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Understanding the Restriction and Disqualification of Directors in Irish Companies
By Sinéad Floody ACG, 2nd August 2024
In the corporate world, the integrity and accountability of company directors are paramount. Ireland, like many jurisdictions, has mechanisms in place to ensure that directors adhere to company law. The Restriction and Disqualification of Directors are two such mechanisms that serve as a safeguard against misconduct and protect the interests of creditors, shareholders, and the public. While the Courts handle the issuance of restriction and disqualification orders, there is an administrative option available that allows a director to accept restriction or disqualification voluntarily, bypassing the need for a court hearing.
What is the Difference Between Restriction and Disqualification?
Restriction
Directors can be restricted for five years if they cannot convince the court of their honesty and responsible management of a company that has gone into liquidation or receivership. This action can be initiated by a liquidator, receiver, or the Corporate Enforcement Authority (CEA). This measure aims to prevent the misuse of the principles of separate legal personality and limited liability. It addresses the issue of individuals who dissolve an insolvent company with substantial debts and then promptly establish a new company, avoiding the debts of the previous one. This practice is commonly referred to as “phoenix trading”.
The responsibility lies with the director to prove to the court that their conduct in managing the company’s affairs was both honest and responsible and that they reasonably cooperated with the liquidator. This law also extends to shadow directors and de facto directors, and it applies to anyone who was a director at the time of, or within 12 months before, the company’s winding up or receivership.
When a director faces restriction, they are subject to stringent conditions if they wish to serve as a director or secretary of an Irish company or are involved in establishing or promoting one. The company in question must have a minimum allotted share capital with a nominal value of €500,000 for a public limited company, or €100,000 for other company types. Additionally, all shares must be paid in full. For a director facing restriction, the implications are costly. If an individual continues to serve as a director after a restriction has been imposed without ensuring the company is adequately capitalised, they will be considered to have breached the Companies Act and will face automatic disqualification.
Disqualification
Disqualification imposes a heavier burden on a director than restriction. It prohibits the director from being appointed or acting as an auditor, director, or other officer, as well as from being a liquidator or receiver. Additionally, it disallows directors from participating in the promotion, formation, or management of any Irish company for a duration determined by the Court. A director may be disqualified if they are convicted on indictment of an offence related to a company, or an offence involving fraud or dishonesty. Unlike restriction, disqualification is applied irrespective of the company’s capitalisation, and can be sought by the CEA, the Director of Public Prosecutions, a shareholder, a creditor, an employee, an officer of the company, a receiver, or a liquidator.
In the event of a conviction on indictment for any offence under the Companies Act or related statutes, or for any offence involving fraud or dishonesty, an individual will be subject to automatic disqualification by the court. Such disqualification typically spans a period of 5 years, or as determined by the court, and necessitates the court to inform the Companies Registration Office (CRO) for inclusion in the public register of disqualified persons.
Furthermore, the CEA holds the power to petition the courts for the disqualification of any individual on several grounds, including repeated offences concerning accounting records, persistent non-compliance with the Companies Act, or engagement in fraudulent or reckless trading as a company officer.
The Role of the CRO and CEA in Restriction and Disqualification
The CRO and the CEA play crucial roles in enforcing these penalties. The CRO maintains a register of disqualified and restricted directors, while the CEA investigates alleged breaches of company law and can seek restriction or disqualification orders against directors. The CEA diligently monitors compliance with restriction and disqualification orders, and bring individuals who violate same to court. Those who breach restriction and disqualification orders may face substantial penalties, including fines up to €50,000 or imprisonment for a term not exceeding five years.
Guidelines for Ensuring Directorial Compliance
To ensure compliance and avoid the risk of restriction or disqualification, it is imperative for directors of Irish companies to have a comprehensive understanding and consistent application of their directors’ duties. Decisions should be made with honesty and responsibility. It is also essential for directors to have strong support systems in place, which may include engaging the services of a company secretarial agent, an accountant, and a solicitor to assist with company management as necessary.
Should you require any assistance with any of the aforementioned information, directors duties, or have any additional questions regarding the restriction and disqualification of directors, please do not hesitate to get in touch! Contact the Company Bureau team at +353(0)1 6461625 or fill out our online contact form.
Disclaimer: This article is for guidance purposes only. It does not constitute legal or professional advice. No liability is accepted by Company Bureau for any action taken or not taken in reliance on the information set out in this article. Professional or legal advice should be obtained before taking or refraining from any action as a result of this article. Any and all information is subject to change
