Disqualification & Restriction

Tingey

A recent case in the High Court highlights the difference in Disqualification and Restriction Orders

Background

In a recent case Judge J Quinn exercised discretion in imposing the lesser sanction of a restriction order rather than a disqualification order against the directors of Meridian Motors Limited in a recent High Court decision.

The liquidator sought orders of disqualification or, alternatively, orders of restriction against the company directors under sections 842 and 819 of the Companies Act 2014 (CA 2014).

Finally, the directors were barred from being involved with any company for a period of five years by the High Court (unless such a company meets certain capitalisation requirements as set out in section 819(3) of the CA 2014).

Disqualification vs. Restriction

The onus is on the director to satisfy the court that he or she acted honestly and responsibly in relation to the conduct of the company's affairs, that he or she cooperated with the liquidator in relation to the winding up of the company, and that there is no other reason why the order of restriction would be just and equitable to impose.

In contrast, the onus is on the applicant (typically a company's liquidator) to establish the grounds relied on under section 842 of the CA 2014. Among these grounds are the following:

• that the director has committed any fraud against the company, its members, or creditors;

• and the director has been found guilty of any breach of his or her duty as a director;

• that a declaration has been granted in respect of the director under section 610 of the CA 2014 (i.e. a declaration of personal liability for fraudulent or reckless trading);

• and that the director's conduct renders him or her unfit to be involved in the management of a company.

The burden of proof required for a disqualification order is not discharged.

In this case, an order for disqualification was sought against the company directors under section 842(d) of the CA 2014, claiming that their actions rendered them unfit to be involved in the management of a company. In his grounding affidavit, the liquidator identified several areas of concern. The most significant issues relied on by the liquidator to satisfy section 842(d) were alleged VAT fraud, alleged invoice falsification, and the liquidator's "concerns and suspicions" about car theft prior to his appointment.

Quinn J, while acknowledging the issues, concluded that the liquidator had not discharged the onus of proof required for a disqualification order. He stated the following:

"For s. 842 the burden is on the applicant to prove grounds for a disqualification order. It is not sufficient, as it may be under s. 819, to simply identify “issues of concern” or “of suspicion” and more is required. Where an applicant applies for a disqualification order it is incumbent on him to identify the provisions within s.842 he invokes, and adduce evidence to prove the relevant ground".

Quinn J then dealt with the liquidator's other, less serious issues, such as failing to keep proper books and records, trading while insolvent, incurring significant VAT liabilities, and unfairly preferring a connected-company creditor over non-connected / third party creditors. He held that these were issues that would render the company directors unfit to be involved in the management of a company for the purposes of section 842(d) of the CA 2014. However, he stated:

"…[his] findings on those matters establish that the court has the discretion to make a disqualification order. It seems to me that in exercising that discretion, I should take account of the fact that the respondents have had to meet allegations of fraud which were serious in nature but were presented without adducing probative evidence."

In conclusion, he said that, taking into account all of the relevant circumstances, he would apply section 845(3) of the CA 2014 and impose the lesser sanction of a restriction order on the company directors.

This judgement brings into focus the difference for Directors between disqualification and restriction from a Corporate Governance point of view.

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