The Gazette 1995

GAZETTE

MAY/JUNE

1995

Restriction of Company Directors and the

Provisions of the Companies Act, 1990

by Andrew Walker, Barrister-at-Law

Part 1*

Recently Mr. Justice Murphy has

indicated that in the course of the

winding up of insolvent companies the

provisions of the Companies Act, 1990

with regard to director restriction

shall, as far as he is concerned, be

enforced. This development has far

reaching consequences for all

directors, be they executive, non-

executive, part-time or shadow

directors, of such companies and is

yet another area where company

directors can face severe sanction

from the court. This article proposes

to consider these provisions and their

effects on directors, the manner in

which restriction can be avoided

along with the procedural aspects of

the area and indeed, the shortcomings

of the legislation.

The statutory intent regarding director

restriction is to avoid situations where

directors jvould close down one

insolvent company with numerous

unpaid creditors, and set up the next

day without sanction and without

having to meet any capital

requirements. In the UK such a

scenario was neatly summarised by

Browne-Wilkinson V-O

as,

. . an attempt to carry on the same

business on the same premises,

leaving behind the creditors of the

old business. This is exactly the

kind of behaviour by directors that

is most to be deplored in that it is

the use of the fabric of a limited

company to deprive creditors of

their money and simply to change

the cloak in which that is done from

one company to the next."

The Provisions

The provisions on restriction of

directors which are found in Part VII

of the Companies Act, 1990, came

into force on the 1st August, 199P

Andrew

Walker

and apply to any company

if:-

(a) at the date of the

commencement of its winding

up it is proved to the court, or

(b) at any time during the course of

its winding up the liquidator of

the company certifies, or it is

otherwise proved, to the court,

that it is unable to pay its debts.

It should be emphasised that the

provisions apply to all insolvent

liquidations, whether compulsory or

voluntary. These provisions in respect

of insolvent liquidations equally

apply, with the necessary

modifications, to receiverships

. The

Act is silent on the extent of property

to which a receiver must be appointed

before the provisions are to apply

, yet

it appears that the receiver should be

appointed over the whole of the

company's property, as otherwise all

receiverships would precipitate the

restriction procedure.

In the UK it has been held

that where

there are two events of insolvency, i.e.

an administrative receivership

followed by a winding up, that the

first date of insolvency is to be

applied in relation to any time limits

that may arise. This seems

unsatisfactory as the latter event,

which will invariably be a winding up,

will expose more on the internal

workings of the company.

All persons at the date of the

commencement of the winding up of

such a company who are directors, or

were directors at any time in the 12

months prior to such date, become

liable under the Act. Shadow

directors

are subject to such liability

as well

However the provisions are only

applicable to companies wound up or

placed in receivership on, or after

August 1, 1991. As has been clearly

accepted in this jurisdiction legislation

will not operate retrospectively if it,

". . . takes away or impairs any

vested right acquired under existing

laws, or creates a new obligation,

or imposes a new duty, or attaches a

new disability in respect to

transactions or

considerations

already past"."

The imposition of a restriction order

on a director who has resigned from

his position prior to the operative date

of the provisions would be tantamount

to imposing on him such a disability

for his prior actions and therefore

such directors must be exempt from

the Act. By way of example,

therefore, a former director of a

company that went into liquidation on

November 1, 1991 and who resigned

his position on 1 May, 1991 will not

be liable to restriction under the Act.

Hence all directors of a company that

goes into liquidation, or is placed in

receivership and is shown to be unable

to pay its debts, either at the time of

the commencement of the winding up

or receivership, as the case may be, or

at any time thereafter, are liable to

restriction under section 150. This

section provides that:-

(1) The court shall, unless it is

satisfied as to any of the matters

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