Insolvent Companies and the Company Law Enforcement Act 2001
Paul Appleby, Director of Corporate Enforcement
Introduction
The Company Law Enforcement Act 2001 introduces many new measures to assist compliance and enforcement with company law. An area which seems to be generating particular interest is the role which I, as Director of Corporate Enforcement, will exercise over liquidated and unliquidated insolvent companies. I have accordingly decided to avail of the Institute’s kind invitation to contribute an article to “Accountancy Ireland” to give you a preview of my current plans in this area.
The primary purpose of the relevant provisions in Part 5 (Winding-up and Insolvency) of the 2001 Act is to address more effectively the so-called “Phoenix Syndrome”, whereby companies go out of business leaving substantial debts unpaid and where the directors of the failed companies start similar corporate enterprises without having to account for their previous conduct. Where these directors have acted dishonestly or irresponsibly in managing their former business, the consequences can be fatal or seriously damaging for other genuine and compliant companies. The new Act seeks to ensure that improper corporate behaviour is properly sanctioned, in order to reduce business risks and support fair competition in the marketplace.
The powers available in the 2001 Act may be classified under two main headings:
- those available to enable the Director to examine directly circumstances suggesting misconduct on the part of directors and other persons associated with an insolvent company. These powers apply regardless of whether the insolvent company is in official or voluntary liquidation or is unliquidated;
- those available to enable the Director to supervise the activity of liquidators (and receivers) in the discharge of their legal functions under the Companies Acts.
What are the Director’s Powers to examine and remedy possible misconduct?
By amending and extending various provisions in the Companies Acts of 1963 and 1990, the legal powers being made available to the Director in the 2001 Act include:
- the power to apply to the High Court for an order to permit the inspection and copying of the books and documents of a company;
- the power to apply to the High Court to summon any company officer or other relevant person before the Court for examination;
- the power to apply to the High Court for an order to enter premises, search for and seize any money, property or company books and documents found on the premises;
- the power to apply to the High Court for an order to arrest an officer of the company and seize his or her books, papers and movable personal property, in circumstances where he or she may be about to quit the State or otherwise abscond, remove or conceal personal property in order to evade specified obligations;
- the power to apply to the High Court to compel an officer or other specified persons to repay money or property to the company or otherwise to compensate its assets, to such extent as the Court thinks just, in consequence of the misapplication of company assets, misfeasance or any other breach of duty or trust to the company;
- the power to apply to the High Court to order a director or other officer not to remove his or her assets from the State or reduce his or her assets within or outside the State below a specified amount in certain defined circumstances.
How will the Director’s Role affect that discharged by Liquidators?
The first point to make clear is that the above powers are intended to complement, rather than replace, the role currently discharged by liquidators under company law. The purpose of the provisions in the 2001 Act is to ensure that the collective impact of our respective duties will improve standards of conduct and legal compliance for those involved with failed corporate enterprises.
The principal points of contact between liquidators and the Director will arise as a result of the following provisions:
- the Director will receive from the Registrar of Companies a copy of the notice of appointment of every liquidator in a voluntary winding-up (section 278(1) of the 1963 Act as amended by section 48 of the 2001 Act);
- where it appears that any past or present officer or any member of a company in a voluntary winding-up has been guilty of any offence in relation to the company for which he or she is criminally liable, the liquidator is required to report to the Director and to provide such information as he may require. The High Court may also order a liquidator to do so in any winding-up (section 299 of the 1963 Act as amended by section 51 of the 2001 Act);
- the liquidator of an insolvent company must provide to the Director a report in a prescribed form within six months of his or her appointment or within six months of the date of commencement of the provision (whichever is the later) and at intervals thereafter required by the Director (section 56(1) of the 2001 Act);
- unless exempted by the Director, the liquidator of an insolvent company must apply to the High Court for the restriction of each of the company’s directors between three and five months after the liquidator has provided the Director with his or her report under section 56(1) above or at such later time as the Court allows and advises the Director (section 56(2) of the 2001 Act);
- the Director may, on his own initiative or on receipt of a complaint, require a liquidator to produce his or her books for examination, whether by reference to a particular liquidation or all liquidations, and he may require the liquidator to answer questions relating to the content of the liquidator’s books and the conduct of a particular liquidation or liquidations (section 57 of the 2001 Act).
Consultation Paper on Insolvent Companies in Liquidation
Because the above measures represent significant changes to the law on insolvency and in order to clarify the scope of these changes, I have decided to prepare and publish in the coming weeks a Consultation Paper, in order to discuss with liquidators and other interests how I see my responsibilities being implemented in practice. Some of the issues which I plan to cover in the Paper include:
What insolvent companies will be covered by section 56 of the 2001 Act? Technically, section 56 applies, from the date of its commencement in early 2002, to all new liquidations and to liquidations ongoing on that date. No distinction is made in this regard between official and voluntary liquidations. If it were legally feasible to do so, I would like to phase in the implementation of section 56 and will therefore identify what particular types of insolvent company might be immediately subject to section 56. One option includes:
- all insolvent companies which are placed in official or voluntary liquidation on or subsequent to the date of commencement of section 56, and
- all voluntary liquidations which were commenced after 9 July 2001 (the date of enactment of the 2001 Act) and are ongoing on the date of commencement of section 56.
The population of insolvent companies subject to section 56 can be expanded later to include, for instance, all voluntary liquidations ongoing on a future date or dates.
What information will be included in the liquidator’s report? In summary, the Consultation Paper will suggest that the report should contain:
- basic information identifying the liquidator, the nominee(s) of the appointed liquidator, his or her date of appointment, the company in liquidation and the directors to which the report relates;
- a statement of the company’s affairs;
- the circumstances giving rise to the insolvency of the company;
- the contribution of the directors to the insolvency situation;
- the liquidator’s opinion of the type of Court proceedings, if any, which is warranted (e.g., restriction or disqualification application, prosecution, etc.) and the person(s) to be subject to such proceedings.
How will the Director manage his duties under section 56? The Consultation Paper will propose a number of options to facilitate reporting by liquidators to the Director and the examination of liquidators’ reports under section 56:
- on receipt of notification from the Registrar of Companies that the liquidation of an insolvent company has commenced, I am considering inviting interested parties to provide information on the past corporate record of the company’s registered directors. Any information received would be taken into account in evaluating the liquidator’s subsequent report and in determining if an exemption should be granted under section 56;
- the development of an online submission facility for section 56 reports will be examined;
- bilateral discussions between my Office and liquidators will be facilitated as necessary;
- my Office will ideally wish to inform the liquidator within three months if and to what extent an exemption is being given relieving him or her of the obligation to apply for restriction to the High Court.
Other Issues? Other matters which I plan to address in the Consultation Paper include:
- the criteria for granting section 56 exemptions and
- issues of cost surrounding Court applications arising from the exercise by liquidators of their legal duties under the Companies Acts.
Consultation Paper on Unliquidated Insolvent Companies
The area of unliquidated insolvent companies is also a priority for my Office. Having regard to the numbers of such companies, some criteria will have to apply to select those companies which should receive detailed examination. With this in mind, I intend to publish a separate Consultation Paper outlining some policy options for my Office in the area. These will include focusing on:
- insolvent companies which were active up to a recent date;
- insolvent companies with very significant net liabilities;
- insolvent companies whose directors appear to have a “Phoenix” track record;
- insolvent companies in areas subject to licensing by the State.
Clearly, my Office should try to prioritise those areas of the “Phoenix” problem where we can be most effective in sanctioning delinquent directors and in deterring future similar activity.
Timetable for Commencement
I expect to be formally conferred with my powers by the Tánaiste and Minister for Enterprise, Trade and Employment in two main phases:
- responsibility for company investigations and company law prosecutions will be transferred before the end of 2001;
- insolvency, restriction and disqualification powers will follow in early 2002.
Following its establishment, my Office will publish these Consultation Papers, and I am anxious to receive the views of a wide range of interested parties on our proposals. With the support of the readers of “Accountancy Ireland”, I hope to develop in the coming months practical policies and practices which will help my Office and liquidators in general to discharge an effective role in countering some of the abuses which have existed in company law for some time.
November 2001