A director of a company which has been placed into liquidation and is insolvent (i.e. the company is unable to pay its debts as they fall due) in many instances may receive a formal letter from the solicitor acting for the liquidator of a company informing the director that the liquidator will be applying to the High Court for a Section 819 Order under the Companies Act 2014 (the "2014 Act") on a specified date restricting the director from acting as a director or secretary of any company for a period of five years. 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 and that he cooperated with the liquidator in the winding up of the company. This is known as a "Section 819 Order" and it is a very serious matter if you are the director concerned.
Alternatively, the director may receive a notice from the Office of the Director of Corporate Enforcement (the "ODCE") providing the director in question with an opportunity to submit to a restriction by way of giving an undertaking, without the need for a Court hearing. This is known as a "Restriction Undertaking" and has the same effect and consequences as a Section 819 Order. It is a new administrative procedure introduced under the 2014 Act which is envisaged to reduce the costs of liquidation as it eliminates, at first instance, the need for recourse to the Courts.
From the director’s perspective it is important to consider carefully whether or not to accept a Restriction Undertaking or to defend any such application as a Section 819 Order as being a restricted person a number of negative consequences outlined below and can in many cases open the door to other more serious actions against the director.
Consequences of a Section 819 Order and Restriction Undertaking
A Section 819 Order or a Restriction Undertaking 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 or be involved in the promotion or formation of another company for a period of five years unless it is adequately capitalised. In the case of a public limited company (other than an investment company) or a public unlimited company the capital requirement is for an allotted share capital of nominal value not less than €500,000, or €100,000 in the case of any other company.
It is important to note that this does not simply mean having €50,000 or €100,000 (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 allotted 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 819 of the Companies Acts.
It should be noted that serious sanctions are imposed on a restricted person that contravenes a restriction order. In the event the restricted person continues to act as director of a company without the adequate capital being in place is deemed, without any more proofs being required, to have contravened the 2014 Act and will automatically be disqualified as a director. Contravention generally of a restriction order is a serious matter which may result in disqualification as a director for a period of ten years or such other period as the Court decides.
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 819 application.
The 2014 Act introduced a new administrative procedure whereby the ODCE may, at his discretion and where he has reasonable grounds to believe that the person is a director of an insolvent company, send a notice to the director concerned requesting that the director submit to a restriction. In this case the director will have 21 days from the date of the notice to decide whether or not to accept the restriction by signing and returning the relevant restriction acceptance document to the ODCE. In the case the director accepts the restriction the ODCE registers the Restriction Undertaking in the Companies Registration Office for inclusion on the register of restricted persons.
During this 21 day period any person who is aware of the notice is restrained from applying to Court for a Section 819 Order. In the event that the director declines to accept restriction, the liquidator is obliged to apply for a Section 819 Order as outlined above unless the ODCE relives the liquidator of this obligation.
The consequences for a director giving a Restriction Undertaking are exactly the same as being subject to a Section 819 Order as outlined above. However, the director may seek to be relieved from his Undertaking by applying to the Court under Section 822 of the 2014 Act. The Court may grant relief only if it considers it just and equitable to do so and will grant the relief on the terms as it sees fit.
While it may seem tempting to a director to give a Restriction Undertaking so as to avoid Court or equally to refuse to give an Undertaking in efforts to defend his director status, there are pros and cons in deciding to do so and these will depend upon the director’s particular circumstances. Therefore, this decision should not be taken lightly and without proper consideration of the consequences.
Possible Further Action Brought by Liquidator / Creditors After a Section 819 Order
It is also possible that the Section 819 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 819 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 819 application and can in certain circumstances lead to the director in question being personally responsible for the debts of the company.
Defending a Section 819 Application
A Section 819 application is a serious matter and directors would always be advised to defend the application. It is no longer a sufficient defence for 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 819 Order should be made by the Court. Under the 2014 Act the director now must also prove that when requested to do so by the liquidator, he cooperated as far as could reasonably be expected in relation to the conduct of the winding up of the insolvent company.
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:
- The extent to which the director has or has not complied with any obligation imposed on him by the Companies Acts;
- The extent to which the director’s conduct could be regarded as so incompetent as to amount to irresponsibility;
- The extent of the director’s responsibility for the insolvency of the company;
- 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
- 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 819 Order unless 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 819 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 819 application against you please contact Adrian Burke & Associates at firstname.lastname@example.org.