Restriction

Parts 13 / 14 – Restriction and Disqualification

The law on restrictions is substantially as it was. The main points are as follows:

  1. Only directors of insolvent companies may be subject to a restriction application.
  1. The definition of insolvent company is as it was (Section 818).
  1. Only three persons have locus standi to apply for a restriction order: the Director of Corporate Enforcement; the liquidator of the insolvent company; a receiver of the property of the company.
  1. Restriction lasts 5 years. The Court has no discretion to alter that period.
  1. The restriction applies to all types of company (Section 819(6)); that this is expressly stated is new.
  1. The defence available to directors is to show that they acted honestly and responsibly in relation to the conduct of the affairs of the company.
  1. The new element is that in addition to the above requirement, the Court must be satisfied that the director co-operated “as far as could be reasonably expected” with the liquidator “when requested to do so by the liquidator”.
  1. The old “no other reason why it would be just and equitable” formula is retained, but the pointless subsections (b) and (c) of Section 150(2) of CA 1990 are discarded.
  1. The capital requirement is retained, but increased. If a director wishes to be appointed or act in any way as a director or secretary of a company after he has been restricted, he may, as long as the company has an allotted share capital of not less than €100,000 in the case of a private company limited by shares (the capital requirement in relation to a PLC is €500,000).
  1. In the case of a guarantee company, at least one of the members must give a guarantee of not less than €100,000 if a restricted director is joining the board. This is new.
  1. The court may order that the respondent pay the costs of the application and some or all of the applicant’s costs (Section 820).

Practitioners will recognise Sections 151 to 158 of the companies Act 1990 in what follows below, and in the next part (“Companies that have a restricted person on the board”). There are very few changes and modifications, but where there are, they are highlighted in a different colour.

• If the liquidator learns that a restricted director is acting in contravention of a restriction order and that a company or its creditors may be “jeopardised”, then the liquidator must inform the court about this “as soon as practicable” (Section 821). The court will make whatever order it sees fit. Failure to inform the court leaves the liquidator open to a €5,000 fine and/or a prison sentence.

• Under the old law, a restricted person was permitted to apply to court for relief from the order within 1 year of his restriction. That has been changed. Now, a restricted person can ask the court for relief at any time during the restriction period. The procedure, and the parties which must be notified, are set out here (Section 822).

• A register of restricted persons will continue to be kept by the CRO (Section 823)

If a restricted director wishes to be appointed director or secretary of a company, he must give that company written notice of his status as a restricted director, with the 14 days immediately before appointment as director or secretary (Section 825). Failure to do so is a Category 3 Offence.

Certain provisions of the Act are disapplied when a “company that has a restricted person” – to use the language of the Act. For example, such a company cannot use the Summary Approval Procedure (unless it is for a members’ voluntary winding up) (Section 827). This is new.

Nor does a company that has a restricted person enjoy the exemptions laid out here (Section 240) regarding arrangements of a certain value, or here (Section 245), regarding loans, etc, to directors for the purpose of business transactions.

The company may not sell non-cash assets to the restricted director until a number of rules (set out here (Section 828)) are satisfied (it is a Category 3 Offence to do so, for company and officers). The rules include independent valuation and the passing of an ordinary resolution at general meeting. Officers of the company must give “such information and explanation” to the independent valuer as the independent valuer thinks necessary (Section 829).

If a company with a restricted person allots a share that is not fully paid up, the allottee will be liable to pay the company the full amount that the company should have received, with interest (Section 832). This does not apply to bonus shares or shares allotted under an employees’ share scheme. Section 833 provides a similar rule in cases where a share is allotted but not fully paid for in cash.

A company with a restricted person can apply to court for relief in relation to an issue regarding the restricted person, but only if the restricted person did not give notice in writing of his restricted status in the 14 days before being appointed to the company (Section 834).

If a company learns that one of its directors is restricted but carries on business without complying with the capitalisation requirement and the company is subsequently wound up, Section 836 provides for the imposition of personal liability for the company’s debts on its officers.