As for our comparator jurisdictions, the United States does not have any form of disqualification regime, although the Securities Exchange Commission is empowered to disbar a person from acting as a director of a registered securities issuer. Norway does have such a regime. Under this regime directors may be disqualified if they commit offences that are related to bankruptcy or they are deemed unfit to manage companies. However, the court can decide that directors should be removed from holding existing positions in companies that have not become insolvent.
Disqualification can only apply to directors of Norwegian registered companies. Notification of disqualification is given on a public register, namely one held at the Norwegian Company Registry. As with many EU Member States, the officers at the Norwegian Company Registry will check that all those to be registered as directors of companies are not already disqualified. There is no provision for checking disqualifications in foreign jurisdictions and no provision for sharing Norwegian disqualifications with other nations. While some Member States require their company registering authority to check whether a director is disqualified when he or she is appointed to a company, new or existing, 73 and other states require a person taking up a directorship to declare that he or she is not subject to disqualification, generally reliable procedures for ensuring that disqualified directors are not appointed as directors in other companies are not as robust as one would like.
There is evidence that in several Member States persons who are disqualified are engaged in running or controlling companies even though they are not registered as a director. This might be done by relying on nominees or influencing registered directors. Consequently, there appears to be merit in disqualifying persons from managing or controlling companies as well as acting as directors.
This might require the use of the concept of de facto and shadow directors and including in disqualification orders prohibition on acting as either a de facto or shadow director of a company. Most Member States rely on court orders for the disqualification of directors. The order might be the decision of the bankruptcy court that orders the bankruptcy of the company or oversees other insolvency proceedings or the decision of a separate court.
The United Kingdom has introduced a different or extra approach. While disqualification can be ordered by a court, a director may agree to provide an undertaking not to act as a director for a period of time if it is made clear to him or her that it is the intention of the authorities to bring disqualification proceedings against the director.
This process is faster, as it obviates the need to institute proceedings in the courts, waiting for a hearing date and then having a trial, and it is less costly for both directors and the UK authorities. It also means that the director is not subject to the same publicity. But having said that, any undertaking given is included on the register of disqualifications that is available to the general public so the effect is the same as obtaining an order.
Also, as with orders, the giving of undertakings is usually published in government media releases. As far as foreign disqualifications are concerned there is little done in most Member States to apply them within their own jurisdiction. This is the case in relation to the United States and Norway as well. Nevertheless it is much easier now for companies to operate in another Member State and they might do this while having disqualified directors as part of their boards. Generally only directors of companies registered, or having their real seat, in the home jurisdiction will be subject to disqualification orders.
There tends to be no checking as to whether foreign directors have been disqualified or disqualification orders sought in other countries when they are registered as directors in the relevant Member State. Belgium may impose a criminal prohibition, restricting directors from acting in certain professional capacities, if a director has been convicted of bankruptcy offences in foreign courts. In Estonia, the Ministry of Justice is empowered to establish a list of disqualification orders in foreign states whose legislation is recognized in Estonia. Foreign orders will only apply in Germany if the order relates to intentional offences which are comparable to those which will lead to disqualification under the German Criminal Code.
In some Member States foreign directors may be disqualified. In the United Kingdom, foreign directors of foreign companies companies who are incorporated or having their real seat outside of the United Kingdom that are being liquidated or capable of being liquidated in the United Kingdom may be disqualified.
So it seems eminently possible for a state to disqualify a director based on what he or she did in another Member State. The drawback might be obtaining sufficient evidence about what actually occurred in another jurisdiction.
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There is little in the way of provision for the recognition of disqualification orders in other Member States. Perhaps the interconnectedness of national insolvency registers required by article 25 of the recast EU Insolvency Regulation 78 would overcome this. It would appear that the network of national registers under article 24 of the recast Insolvency Regulation, and provided through the European e-Justice Portal, would not automatically encompass disqualification orders.
This, therefore, permits the inclusion of disqualifications in the register, but it does not compel it. Thus, there seems to be provision to have an EU register of disqualifications but it will take movement from each Member State. In this respect each Member State would need to provide access online to information concerning disqualified directors. In Estonia, it has been reported by insolvency practitioners that automatic recognition of disqualification of directors, business bans or other restrictions to act as manager, director, etc.
This would be the case even if the disqualification order was delivered by a court other than the one in which insolvency proceedings were opened article 25 1. The issue that might be in doubt is whether the disqualification application and order can be said to be closely linked with the insolvency proceedings.
But if the disqualification order results from the insolvency of the company that is the subject of the insolvency proceedings then it is likely that it could be seen as being linked provided that it can be said that it is closely connected with the insolvency proceedings. Nevertheless, while an order should be recognized, the order might not be enforced in practice, which is another issue.
Recognition and enforcement of any order will always fall under the exclusive authority of the courts of the Member State where the measure is to be executed. The Reflection Group on the future of EU company law did have some misgivings about the making of information easily available across borders as it caused, potentially, a number of issues such as language problems, problems linked to the fact that the grounds for disqualification differ between Member States, and problems related to personal privacy, data protection and fundamental rights.
There has been some concern as to whether disqualification falls within company law or insolvency law. While there are differences in the structuring of boards of directors across the EU, all jurisdictions impose some kind of duties on directors and all but a couple of Member States provide for disqualification procedures to be brought against errant directors. Importantly, all Member States provide that directors have certain obligations when their company is insolvent or even when it is near insolvent.
In most Member States there is no specific duty that requires directors to formulate plans to take preventative action to avoid insolvency or to identify possible insolvency problems, although it is arguably implicit that they do have some obligation in this regard as the directors should be managing the company responsibly and in such a way that is designed to ensure solvency. When a company is insolvent, then in all Member States there is a need for directors to do something that is different from what they have been doing. What that involves varies across the EU.
Directors duties in the zone of insolvency | ICAEW
In some Member States there is a shift in the nature of the duties of directors when a company is near insolvent or actually insolvent, but in the majority of states there is not. In these latter Member States, directors are usually obliged to file for bankruptcy if their company is insolvent. Also, in some states directors are obliged to modify their management approach and to take certain action if they know that their company is heading for insolvency in order to minimize creditor losses. In this last instance, if directors do not take action then they might be held liable for what is often referred to as wrongful trading.
In some Member States directors are obliged not to enter into obligations which they knew or ought to have known that their company could not fulfil; if they do then they might be held liable in tort. The difference in approach between Member States is quite marked. For instance, there is a lot of difference between saying that the duties of directors must change when insolvency occurs or is near, on the one hand, and requiring directors to file insolvency proceedings when they know or ought to know that their company is insolvent.
Arguably, the big difference is that with the latter the opportunity for the directors to seek to restructure is limited. Any form of informal restructuring will effectively not be permitted, which might be seen as a drawback as informal restructuring is generally less costly and saves time. But even in states where there is no obligation to file for insolvency proceedings when directors know or ought to know that their company is insolvent, directors might be restricted in the formulation of restructuring plans, since if the plans are not approved and implemented then the directors could be liable for breach of their duties or wrongful trading.
Sanctions for breaches of duty vary across the EU. Some Member States only provide for civil liability, while others provide for both civil and criminal liability. In some places director disqualification can result from a breach. Disqualification might be ordered in the insolvency proceedings themselves, whereas in other Member States separate proceedings have to be instituted.
All reporters save for one recognized that there were several obstacles to the enforcement of breaches of duties. Most reporters identified a number of obstacles, with the fact that the directors are impecunious, proceedings can be costly and the time delay in getting a hearing of proceedings being the most frequently cited. All but a couple of Member States have some form of disqualification process for directors and it is generally seen as an important element in the monitoring and control of directors.
The approach taken to disqualification differs across the EU, and is reflected in the time periods prescribed for disqualification, the reasons for making a disqualification order and whether there are other consequences, besides disqualification from acting as a director, from the handing down of an order. While a number of Member States do not have public registers which note who is disqualified and which are easily accessible, many do.
Clearly there is a problem with recognition of disqualification orders made in other Member States. It would seem that generally speaking the fact that a director is disqualified in Member State X will not bar him or her from acting as a director in Member State Y, and there are few, if any, checks on whether a person who presents himself or herself for appointment as a director in one Member State is disqualified in another.
Thus, disqualified directors might move their residence to a Member State where they are not disqualified and continue to act as directors in their new home jurisdiction. It would seem that often disqualified directors in one state might run a company in another state through nominees. A good example of this is the decision in Kornhaas v. Dithmar , 85 which was discussed earlier.
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This manifests the concerns that can occur where a matter involves the intersection of company law and insolvency law. It can, clearly, cause uncertainty. There are different approaches across the EU in relation to directorial liability and disqualification. Perhaps the major concern is that there is a need for some uniform approach as far as either the framing of disqualification law or the recognition by Member States of any disqualification determination made concerning directors in another Member State. Not registered? Sign up.
More Contact us Publish with us Subscribe. Print Save Cite Email Share. Show Less You do not have access to this content. Critically analysing the substantive law of insolvency in the EU countries as a whole, this book carries out horizontal cross-cutting analysis of the data gathered from a study of national insolvency laws. It selects particular areas for detailed discussion and considers the pros and cons of particular legislative solutions. Ranking of claims and order of priorities Avoidance and adjustment actions Procedural issues relating to formal insolvency proceedings Commission Recommendation on a new approach to business failure and insolvency Second chance for entrepreneurs Consumer over-indebtedness Appendix 1: First questionnaire Appendix 2: Second questionnaire Glossary Bibliography Index.
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Directors' duties in the context of insolvency
Sanctions for not filing for bankruptcy in time when company is insolvent. Civil liability and would also include liability for continuing to do business. Civil liability to the creditors for any damage caused to creditors by omission to adhere to this duty Criminal liability. No liability for failing to file for bankruptcy but civil liability for intentionally or negligently causing damage to company, for example by not having filed for bankruptcy at the point in time when it must be considered futile to keep the company going without further losses to creditors.
Civil liability for loss of creditors after the time when insolvency proceedings should have been filed damages claim. Criminal liability, with the possibility of imprisonment Prohibition to pursue a business Civil liability. Civil liability in tort damages claim Criminal liability. Civil liability to the creditors for the loss sustained by creditors because of a diminution of company assets as a result of not taking action in light of threatening insolvency.
Civil liability for loss suffered by creditors in light of directors engaging in reckless trading and fraudulent trading. Also disqualification and restriction. Criminal liability with the possible imposition of a fine. If an officer or director breaches his fiduciary duties in any number of ways, who may bring the action against that individual? May a creditor, on its own, successfully sue an officer or director for breaching his fiduciary duties?
Judge Carol A. In this recently published case In Re John H. Netzel, et al. As a general rule, fiduciary duty is owed to shareholders, not creditors. That means a creditor may not sue an officer or director for a breach of fiduciary duty. The advent of insolvency, however, creates the exception to the general rule. Upon finding that the exception exists, the fiduciary owes a duty not only to the shareholders, but also to the general creditor body.
The court gives the following reasons for its point of view. Although the existence of an insolvency proceeding is not required for claims to be brought against directors under s 64, an insolvency administrator usually brings such claims against directors. Secondly, s 64 preserves the company's assets from financial outflow which is also in favour of the company's future insolvency creditors. Since the German Federal Court of Justice is of the opinion that s 64 has to be qualified as insolvency law also from a European law perspective, the court ruled that the fact that K Montage's COMI was in Germany, and insolvency proceedings had been commenced there, meant that s 64 would apply to the question of directors' duties for any companies which are comparable to a German limited liability company GmbH.
According to the German Federal Court of Justice, a private company limited by shares like K Montage and a German GmbH are comparable because in both company types the shareholders are, in principle, not personally liable for company debts and the business is conducted by a person who is not necessarily a shareholder. In both types of company there is a danger the directors might make payments after the company is already insolvent thus diminishing the insolvency estate at the expense of the creditors. In the court's view, these circumstances justify that directors of a German GmbH and of an English private company limited by shares are treated equally when it comes to the question of liability for payments made in an insolvency situation.
There has long been debate in Germany about whether — from a European law perspective — the issue of directors' liability is a matter of the insolvency law regime or the corporate law regime. The German Federal Court recognises that the question of whether s 64 should be considered as insolvency law rather than corporate law from a European law perspective is a matter for the ECJ.
What if the English court were faced with a wrongful trading claim by a liquidator of an English company against a German domiciled director? English law on directors' duties is codified in the Companies Act However, the Insolvency Act IA contains certain provisions for dealing with delinquent directors, for example, s summary remedy against delinquent directors , s fraudulent trading , and s wrongful trading.
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Unlike s 64 in Germany, any claim under ss — of the Act requires an insolvency to be afoot in England as, currently, the claim can only be brought in the course of winding up this will extend to administrations once the Small Business, Enterprise and Employment Act comes into force. These sections apply to any company in liquidation: a German company can enter liquidation here, for example, if its COMI is here, or by being wound up as an unregistered company under s of the Act.
Unlike s 64, ss — form part of English insolvency legislation rather than English corporate legislation. Its directors were resident in Monaco. Accordingly, the English court has jurisdiction to apply s to directors of a foreign company when the foreign company has been wound up under s The Court of Appeal agreed with the judge at first instance that the proper law of any claim in common law and contract was Russia.
However, Arden LJ observed that while provisions of English insolvency law may be used to enforce directors' duties where a foreign company is being wound up here, the content of those duties will be a matter for the state of incorporation. Arden LJ used the example of s of the Act, which enables a liquidator to claim compensation for breach of duty against directors, but does not lay down the content of that duty.
Adopting the approach of Arden LJ, there is a distinction to be made between the general duties of a director codified in England under the Companies Act and ss and , which form part of the English domestic insolvency regime. In relation to an English company in liquidation, s was held to have extra-territorial effect and was applied against an individual domiciled in France.
The Supreme Court exercised this jurisdiction based on English domestic law. There are other sections of the Act which have been held to have extra-territorial effect, for example, s of the Act Re Paramount Airways  Ch What about disqualification?