"Section 150" Restriction of Directors Proceedings - Explained

1. Introduction

A director of a company which has been placed into liquidation may find that the liquidator of the company will apply to the High Court for an order under section 150 of the Companies Act 1990 restricting the director from acting as a director or secretary of any company for a period of five years. This is known as a "Section 150 Order" and it is a very serious matter if you are the director concerned.

In many instances the first notification that the director receives of such an application will be a formal letter from the liquidator’s solicitor informing the director that the liquidator will be applying to the High Court for a Section 150 Order on a specified date. As a general rule the Court will make the order unless the director can satisfy the Court that he has acted honestly and responsibly in relation to the business of the company. From the director’s perspective it is important to defend any such application as a Section 150 Order has a number of negative consequences outlined below and can in many cases open the door to other more serious actions against the director.

2. Consequences of a Section 150 Order

A Section 150 Order does not of itself “disqualify” an individual from acting as a director of a company however, it does impose a number of financial and administrative restrictions on the restricted person and any company of which he/she is a director.

In particular, a restricted person cannot act as a director or secretary of another company for a period of 5 years unless that company has a paid up share capital of €63,487 in the case of a private company or €317,435 in the case of a plc. It is important to note that this does not simply mean having €63,487 or €317,435 (as the case may be) in the company bank account on the date that the restricted person is appointed as a director. It is an ongoing requirement which has balance sheet implications for the company in question. In addition, a company which meets these increased capital requirements is prohibited from carrying out certain specified transactions such as making loans in favour of directors / other persons connected with directors or providing financial assistance in connection with the purchase of and subscription for its own shares for so long as it has a restricted person as a director.

It is important to note that the above provisions pertaining to minimum paid up share capital and prohibited transactions must be complied with for the duration of the 5 year period. In the event that a company goes into insolvent liquidation while a restricted person is acting as a director of the company, it is possible that the restricted person could be made personally liable for the debts of that company if the company did not comply with the minimum share capital requirements or the relevant director is otherwise seen to have acted in breach of section 150 of the Companies Acts.

Of perhaps greater significance for the director and company in question is the fact that the Companies Registration Office maintains a public register of restricted persons. Appearing on this register has a negative impact on a person’s commercial reputation and may result in banks and other lending institutions being slow to provide finance to the company / director. In addition, in the present market environment, many companies are carrying out more thorough checks on the individuals that they are transacting business with and will obviously be more wary of entering into a commercial relationship with someone who has been the subject of a restriction order.

Finally, the restricted person is also generally required by the Court to pay the liquidator’s legal costs in connection with the Section 150 application.

3. Possible Further Action Brought by Liquidator / Creditors After a Section 150 Order

It is also possible that the Section 150 application may be followed by other more serious court actions against the director by either the liquidator or one or more of the unpaid creditors of the company. In many instances the fact that a section 150 application has been successful can encourage the liquidator / individual creditors to take separate actions against the directors of the company with a general view to getting more money for the creditors of the company. In particular, it is possible (depending on the facts of the case) that actions may be brought against the director for: (a) fraudulent preference, (b) reckless trading or (c) fraudulent trading after the restriction order has been imposed. Each of the above actions are far more serious than a section 150 application and can in certain circumstances lead to the director in question being personally responsible for the debts of the company.

4. Defending a Section 150 Application

A section 150 application is a serious matter and directors would always be advised to defend the application. The onus is on the director in question to prove to the Court that he or she has acted honestly and responsibly in relation to the business of the company and that there is no other reason why a Section 150 Order should be made by the Court.

                

In establishing whether or not the director has acted responsibly in relation to the business of the company, the Court will typically consider the following factors:

  1. The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts;
  2. The extent to which the director’s conduct could be regarded as so incompetent as to amount to irresponsibility;
  3. The extent of the director’s responsibility for the insolvency of the company;
  4. The extent of the director’s responsibility for the net deficiency in the assets of the company disclosed at the date of winding up or thereafter; and
  5. The extent to which the director in his conduct of the affairs of the company, has displayed a lack of commercial probity or want of proper standards.

It is important to note that the liquidator is obliged to apply for a Section 150 Order unless the Office of the Director of Corporate Enforcement (the "ODCE") specifically relieves the liquidator of this obligation. The ODCE can be slow to do this if there is even the slightest suggestion that the director in question has not acted honestly and responsibly in relation to the business of the company. As such, it is quite common for Section 150 Orders to been sought by liquidators in circumstances where it would be wholly unfair for the director to be restricted. In such cases a carefully drafted replying affidavit setting out the director’s defence / explanation in respect of the liquidator’s allegations can result in the Court refusing to grant a restriction order and can also reduce the likelihood of the liquidator being granted an order for his costs against the director.

Perhaps more importantly, a carefully drafted defence lodged by the director can reduce the possibility of the liquidator and / or any creditors of the company taking an action against the director for fraudulent preference, reckless trading or fraudulent trading.

Adrian Burke & Associates’ team of corporate recovery and insolvency lawyers are experienced in acting for directors, creditors and companies in the context of company liquidations. If you are a director who becomes aware of an impending section 150 application against you please contact Adrian Burke & Associates at info@adrianburke.ie.

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