Vol 1 (2004) - Issue 4

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The Restriction of Directors in Ireland

Introduction

The Companies Act 1990 in Ireland introduced the procedure for the restriction of directors (s.150) and expanded the grounds on which directors could be disqualified (s.160). The restriction procedure was established as one of a number of measures designed to prevent the ‘phoenix syndrome’ whereby the directors of a company which becomes insolvent would walk away from the failed company (and its debts) and set up a new one involved in the same or similar business, which would then trade on the first company’s goodwill and/or seek to purchase its assets at an undervalue.

The application of the restriction procedure, however, was not limited to such circumstances. In La Moselle Clothing Ltd. v. Souhali, the court described the ‘primary purpose’ of s.150 as being:

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, represent a danger to potential investors and traders dealing with such companies.

It became apparent after a number of years, however, that the changes introduced by the 1990 Act were not having the desired effect of deterring certain directors from conducting the affairs of companies in an incompetent and dishonest manner. The principal reason for this was that prior to the introduction of s.56 of the Company Law Enforcement Act 2001, s.150 did not expressly require any person (such as a liquidator) to bring such an application.

The problem was addressed in court liquidations through a practice direction in the case Business Communications Limited v Baxter and Parsons. This required all liquidators of companies wound up by the court to make an application under s.150. In the vast majority of voluntary liquidations, no such application was made.

The position has now been altered by the enactment of the Company Law Enforcement Act 2001. Under s.56 of that Act, a liquidator is required to report to the Director of Corporate Enforcement (the ‘Director’) within 6 months of his appointment and is subsequently required to apply to the High Court for a restriction order unless he has been relieved by the Director of the obligation to do so. This provision applies to all insolvent liquidations. In practice, it extends the scope of s.150 to creditors’ voluntary liquidations.

Initially, s.56 applied to all new liquidations and to all ongoing liquidations where the liquidator was appointed from 1 July 2001 onwards. The section was then extended with effect from 30 June 2003, to include ongoing4 liquidations commenced between January 2000 and 30 June 2001. It is not proposed to extend the application of s.56 to liquidations commenced prior to 1 January 2000. With regard to court liquidations commenced prior to 1 January 2000 and which are ongoing, liquidators remain bound by the practice direction in the Business Communications v Baxter and Parsons case. The High Court judge who currently deals with most of these applications has stated that a liquidator of a company wound up by the court which does not come within the ambit of s.56 can apply for relief from the requirement to make an application pursuant to s.150 in certain circumstances.