Restriction of Directors – New Concern for Liquidators

Author: Mark Woodcock

March 22, 2019

In a recent application for directions from the High Court, the Office of the Director of Corporate Enforcement (the “ODCE”) brought a motion to compel a liquidator contest an appeal by directors of a restriction order made against them in the High Court.

Section 683 of the Companies Act 2014 (“CA14”) requires the liquidator of an insolvent company to apply for an Order restricting the directors. It does not require liquidator to contest an appeal by directors.  The ODCE ultimately withdrew the application and paid costs, but the application raises concerns for all liquidators.

Background

The liquidator had been appointed on the petition of the Revenue Commissioners who had agreed to discharge his reasonable costs including that of the restriction of the directors. When the directors appealed the restriction, the liquidator called upon the Revenue to fund him in contesting the appeal. The Revenue considered the terms of the High Court judgment and decided that it would not fund a defence of the appeal.

The liquidator then called upon the ODCE as the body with overall responsibility for the restriction of directors to fund the defence of the appeal. The ODCE responded to say that it was not the responsibility of the ODCE to fund liquidations in this way, but that the provisions of the Companies Act imposed an obligation on the liquidator to contest the appeal.  When the liquidator disagreed with this interpretation, the ODCE brought a motion before the High Court seeking to compel the liquidator to contest the appeal.

The Statute and Interpretation

Section 683(2) CA14 provides that “the liquidator shall apply [1] under section 819(1) for a declaration under that provision in respect of each of the directors of the company.” The question of interpretation is whether “shall apply” includes not only the bringing of the initial application, but also defending any appeal. The consequences for a liquidator of being found as having not complied with the section are very serious. The liquidator is faced with not only reputational damage, but also exposure to a criminal sanction of a term of imprisonment up to six months.

A criminal sanction imposed by a statute requires a literal interpretation of its wording.  On that basis the liquidator’s statutory obligation should be considered discharged once the application to restrict the directors is made to the High Court. It is not reasonable (or legally sound) to extend this obligation to contesting an appeal in the Court of Appeal or indeed further, to the Supreme Court.

In considering whether to contest an appeal, a liquidator must take into account a number of matters including any new evidence from the restricted directors, the availability of funds and the likelihood of a dividend for creditors.

Conclusion

Although this matter did not proceed to a hearing, the position taken by ODCE is a concern to all liquidators. The ODCE was clearly of the view that a liquidator is obliged by law to contest an appeal by directors and it is at least possible if not likely that a similar motion is brought in the future. All insolvency practitioners should take great care to obtain a comprehensive indemnity regarding the costs of a liquidation to include the obligation to restrict directors and any application by the ODCE compelling them to contest an appeal.

[1] Our emphasis

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