In a recent landmark decision, the Supreme Court lifted a restriction order made by the High Court against a non-executive director of an Irish company. The High Court had restricted the director, a chartered accountant, from acting as a director of any company for a period of five years.

The company director in question had been nominated to act as a non-executive director to represent the interests of a group of business expansion scheme (BES) investors. He had only ever acted in a non-executive capacity. At the time of the commencement of the liquidation, the company (Tralee Beef & Lamb Limited) was insolvent and unable to pay its debts. The evidence suggested that there had been a very serious disimprovement in the financial status and standing of Tralee Beef in the months prior to the beginning of the liquidation.

The liquidator formed the view that the director in question had acted honestly and responsibly in relation to the affairs of Tralee Beef. He asked the Director of Corporate Enforcement (DCE) that he be relieved from the statutory obligation (see panel below) to bring restriction proceedings against the director. The DCE declined to relieve the liquidator from that obligation but offered the liquidator no reason for his decision. As the Supreme Court observed, the liquidator was therefore left in a position where he had to bring to the courts an application that he felt was unmerited under pain of being guilty of a criminal offence if he failed to do so.

Prior to the hearing of the Tralee Beef case before the High Court, the courts had generally approached Section 150 applications on the basis that the section had been intended to penalise 'cowboy' directors, and those who were seen as a danger to the public, rather than penalising all who had been directors of insolvent companies per se. However, the High Court's decision in this case amplified the approach taken in previous Section 150 cases and a restriction order was made against the director.

On appeal to the Supreme Court, the order made by the High Court was set aside. The Supreme Court referred to the unusual circumstances in which the company's liquidator had formed the view that the director in question had acted honestly and responsibly but the DCE had refused to relieve him of his statutory obligation to bring a Section 150 application. The Supreme Court had some difficulty understanding the basis upon which the director could disagree with the liquidator's professional judgement, which was reached following an investigation of the company's affairs.

The judgment of the Supreme Court refers in trenchant terms to the statutory regime relating to the restriction of directors, describing it as 'draconian'.

• That it made it mandatory for a liquidator to bring an application to restrict directors in the case of an insolvent winding-up and imposed a criminal sanction upon the liquidator for failing to do so even in cases (such as this) where the liquidator had reached a positive conclusion that the director had acted in an honest and responsible manner in relation to the company. The court noted that the scheme placed the liquidator in a situation where he had no option but to expend the company's money (which might otherwise go towards the satisfaction of creditors) in bringing an application in which he had no belief, a position the court described as 'extraordinary'.
  
  
• The Supreme Court also drew attention to the fact that the court hearing the Section 150 application was obliged to make a restriction order against the parties who were the subject matter of the application unless it was satisfied that the director had acted honestly and responsibly in relation to the conduct of the affairs of the company and also that "there is no other reason why it would be just and equitable" to make a restriction order. The court noted that the latter placed the director in a situation where he had to prove, to the satisfaction of the court, the negative proposition that "there is no other reason". The court queried whether this reversal of the proof was consistent with fundamental fairness and constitutional justice and noted that it was "in stark contrast" to the procedures provided for in the UK for the disqualification of directors.
  
  
• The court also noted that in the case in question the director was a professional man (a chartered accountant) and that the effect of a restriction order on him would be much greater than if he were a 'cowboy' director, the type of person at whom the statutory provision was originally directed.

When the restriction order was made by the High Court, it was interpreted as the courts signalling that they would be taking a 'harder' line in assessing those who had been directors of insolvent companies and was also interpreted as extending the focus of Section 150 applications away from the class of 'cowboy' directors to all directors of insolvent companies. It was also seen as sending a signal that non-executive directors were to be assessed by these new, more rigorous criteria.

The decision of the Supreme Court has been welcomed as a restatement by the court of the purpose of the statutory regime: being the protection of the public from 'cowboy' directors rather than the punishment of those who have been the director of an insolvent company. The Supreme Court has also left open for debate whether the same criteria under Section 150 ought be applied to both executive and non-executive directors and, in particular, those appointed non-executive directors for a particular and specific purpose.

Given the court's trenchant comments about the statutory scheme and the role played by the Director of Corporate Enforcement, it is expected that changes (in the practice of the DCE at least) will be introduced to try to meet the criticisms and observations of the Supreme Court.

Under the Companies Acts, the liquidator of every insolvent company is obliged to bring a court application to have the insolvent company's directors restricted from acting as director or secretary of any other company for a period of five years unless that other company has a paid-up share capital of approximately €63,500. The relevant provision of the Companies Acts (Section 150) applies to any person who was a director of the insolvent company either at the date of or within 12 months of the start of the company's winding-up. Section 150 also applies to shadow directors.

By law, the liquidator is obliged to bring this court application unless relieved from the obligation by the Director of Corporate Enforcement (DCE).

While €63,500 may be regarded as a modest amount of share capital, the public opprobrium attaching to a restriction order may be very damaging to the reputation of the person against whom the order is made (perhaps more so if that person is an individual of professional standing). If an application is made to the court, the court is obliged to make a restriction order unless it is satisfied:

1. that the director has acted honestly and responsibly in relation to the conduct of the affairs of the insolvent company, and
   
   
2. that there is no other reason why it would be just and equitable that he should be subject to a restriction order.

Section 150 places upon the director the burden of proving to the court's satisfaction that he acted honestly and responsibly and that there was no other reason why it would be just and equitable for a restriction order to be made against him.