ODCE-Essay - Summary of ODCE (Office of the Director of Corporate Enforcement) with references PDF

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Summary of ODCE (Office of the Director of Corporate Enforcement) with references to Companies Act legislation and also cases....

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Role ODCE The Office of the Director of Corporate Enforcement (ODCE) was established in 2001 on the recommendation of Working Group on Company Law Compliance & Enforcement 1998. The Office of which is multi-disciplinary and includes Members of the Garda Siochana Fraud Bureau, Accountants, Legal Advisors and Civil Servants. The reason for such an establishment was to ensure compliance with the Companies Acts. It was also designed as a tool to put a stop to “Phoenix Syndrome” whereby Directors of an insolvent company simply went on to establish a new company rising from the ashes of its predecessor to carry on the same business once again availing of the benefits of limited liability. The role may further be divided into five categories as follows: 1. Advocacy 2. Enforcement 3. Insolvency 4. Corporate Services 5. Customer Services Section 949 set outs the role of the ODCE in greater detail. He/she is to encourage compliance with the Companies Act, to investigate suspected offences or acts of noncompliance with the Act or the duties and obligations with which companies and their officers are subject, to enforce the Act by way of prosecution (they may at their discretion refer cases to the DPP), to exercise a supervisory role over liquidators and receivers, to ensure application and enforcement of obligations, standards and procedures to which the companies and their officers are subject, to act (under Chapter 2) as a member of the Supervisory Board (and if appoint under section 907) to act as director of said board and to perform any further function which the Minister may confer to the Director. The ODCE is responsible to act on information received from auditors, professional bodies, liquidators, the public and other regulatory bodies suggesting breaches of the Companies Act. Information may be freely passed through these bodies. The Office has several enforcement options ranging from voluntary compliance, administrative rectification through civil litigation and ultimately criminal prosecution. They may directly or through the courts initiate investigations into the Affairs of the company. In certain instances referral to other agencies may be necessary e.g. if Directors are in breach of loan provisions they may forward the case to the Revenue Commissioners. When applying to the court for the initiation of the investigation into affairs of the Company the court must be satisfied that: a. The affairs of the company are being or have been conducted with the attempt to defraud creditors or members b. Conduct for fraudulent or unlawful purposes is evident c. Conduct in an unlawful manner

Under S764 the Director has the power to appoint an inspector to investigate and determine the true persons who have been financially interested in the success or failure of the company or those who could control or materially influence the policy of the company. In 2015 the majority of complaints received from the public were in relation directors conduct followed by dissatisfaction with Audit procedures. Other complaints were related to AGM/EGM, forgery/false information, improper accounting records and reckless/fraudulent/insolvent trading. The ODCE has pursued a relatively aggressive approach to ensuring compliance. In 2015 directors loan infringements to the value of €21 million were rectified. 132 directions of compliance were issued. 18 statutory demands for relevant information regarding persons acting as directors whilst bankrupt were issued. 150 Directors were restricted and 14 disqualifications were ordered. Pursuing to their role of supervising liquidators, 124 notices were issued to liquidators advising them that they were in breach of their statutory obligations. In more recent times there has been a greater focus on more serious breached which have been referred to the DPP for prosecution by indictment in the Circuit Court. Such actions have proved to serve as deterrent for future wrong doings.

Restriction of Directors  On the application of the Director, liquidator of the insolvent company or receiver of the property of the company, under section 819 the court shall declare that a person who was a director of an insolvent company shall not, for a period of five years, be appointed or act in any way, directly or indirectly, as a director or secretary (liquidator or receiver) of a company or be concerned or take part in the formation or promotion of a company unless the company meets specific requirements (in subsection (3)).  A director of an insolvent company includes both a director and shadow director of an insolvent company (i.e. a company unable to pay its debts) at the of or 12 months before the commencement of the winding up of the company. The Cavan Crystal Glass Ltd [1998] case illustrates the 12 month window of restriction although the company had experienced financial difficulty for three years the director has resigned outside the 12 month window of restriction and therefore could not be restricted. In defining an insolvent company as one unable to pay its debts it must either be proved to the court that at the date of commencement of its winding up that it is unable to pay its debts or at any time during the course of its winding up the liquidator certifies or proves that it is unable to pay its debts.

Under section 819 subsection (3) a restricted director may act when the company has an allotted share capital of nominal value not less than (i) €500,000 in the case of a plc (ii) €100,000 in the case of any other company Each allotted share must be paid up and the whole of any premium on each allotted share must be paid up in cash. If the company has a restricted director or secretary it to becomes restricted in the sense the it may not avail of summary approval procedures, under no circumstance may it loan money to a director, it may not provide financial assistance to purchase its own shares and if they wish to allot shares they are subject to the rules which normally only apply to PLCs. The primary purpose of restriction is not to punish directors but rather to protect the public against the future misconduct of persons who have in the past led companies to insolvency. The rule held in the La Moselle Clothing Ltd v Soualhi perfectly illustrated the purpose of the restriction “the protection of the public from persons who, by their conduct, have shown themselves to be unfit to hold the office of, and discharge the duties of, a director of a company and, in consequence represent a danger to potential investors and traders dealing with such companies” Liquidator: Under section 683 a liquidator may apply to the court to have a Director restricted if this has not already relieved by the ODCE. During the winding up of a company the liquidator must report to the ODCE every six months. In this report he must outlay details of directors and whether they believe that the directors had acted honestly and responsibly. They must also explain why they may be seeking relief from applying for restriction or if they intend to apply for a disqualification. If doing so the office will only grant the relief where a liquidator advances a claim where it is evident the director has acting justly and responsibly. Originally non-executive were not treated differently regarding restriction. In various cases such as Re Dublin Sports Café and Re Tullow Farm Machinery were held equally responsible to executive directors. However, a ruling in the more recent case (Tralee Beef and Lamb) by the HC was turned over by the SC. Criticism regarding failure to establish a difference between executive and non-executive directors. The ruling in the Tralee Beef case was quoted in following cases where the court sought to recognise the “lesser role” of nonexecutives and the fact that they were dependent on executive directors for information. Of note in relation to restriction of directors is that it is no longer a sufficient defence that the director acted honestly and responsibly in his dealings with the company. It must also be shown that the director, when requested to do so by the liquidator, cooperated as far as

could reasonably be expected in relation to the conduct of the winding up of the insolvent company. It is the responsibility of the director to satisfy the court that they have done so. In my opinion, it is important to note that, as held in the La Moselle Clothing case, the entire tenure of the director should be examined and not simply the last few months immediately prior to liquidation. Also held in the La Moselle case was that the court should examine in greater detail the five following factors: 1) 2) 3) 4) 5)

the extent to which the director had complied with CA. the extent to which his conduct was so incompetent as to amount to irresponsibility the extent to which they are responsible for insolvency the extent to which they are responsible for the shortfall in the winding up the extent to which he has displayed a lack of commercial probity and proper standards

Whether or not sheer incompetence merits restriction is an objective standard. Lack of commercial probity to the detriment of the financial well-being of the company will merit restriction despite the director having complied with the Companies act. For example where a director draws excessive sums form the company without regard to the financial health of the company will be said to have acted without commercial probity. Under section 822 the director may apply to the Court for relief from restriction order on equitable and just grounds. Disqualification is of greater severity than restriction. Disqualification applies to a greater host of roles such as promoters, auditors, liquidators, receivers and examiners. If disqualified in capacity of one role will mean that you will be disqualified from acting in any of the other roles mentioned and also from acting, directly or indirectly in the formation or management of a company. Automatic disqualification applies if convicted on indictment of any offence under the CA or any offence involving fraud or dishonesty, even if in personal capacity. Following conviction persons will be disqualified for a period of 5 years. It is at the courts discretion to shorten or elongate this period on application from the defendant or prosecutor. One may be disqualified on application to the court by the ODCE, DPP or member, contributory, employee, creditor, receiver, examiner, liquidator or creditor of the company. The application must be made on the following grounds:   

fraud - In relation to disqualification fraud regarded as a most serious offence being a criminal charge of fraud. breach of duty - Breach of duty regarding disqualification also implies breach of any regulatory duty. declaration that personally liable for debts of a company due to fraudulent or reckless trading

   

unfit to manage - Misjudgement due to “unfitness” alone is not enough to justify disqualification – one must demonstrate lack of commercial probity. default in filing returns or other documents with the registrar – If one is found guilty of 3 breaches of filing within 5 years they are said to be in persistent default 2 or more offences of failing to keep proper books of account allowing a company to be struck off the registrar – In the case of Clawhammer the CoA disqualified directors on the basis they had allowed the company to be struck of the registrar when insolvent rather than winding it up.

It is at the discretion of the Court to make a disqualification order. But because of the severe nature and consequences it has for such disqualified persons it was noted in Kentford Securities case that the court should “feel a high degree of confidence before making any such order”. Under section 819 the court make a declaration if they believe the disqualification application is not just. EXAMPLES OF DISQUALIFCATIONS – BB  A new feature in the CA 2014 permits restrictions and disqualifications to be made by

way of an undertakings procedure. The Office of the Director of Corporate Enforcement can send a notice to the company officer in question requesting that they take the restriction/disqualification as an undertaking without recourse to the court. This process will reduce unnecessary use of resources in making court applications and reduce the costs involved in restriction and disqualification procedures. If guilty of acting whilst disqualified or restricted one will be guilty of a category 2 offence and automatically disqualified for an additional 10 years. Furthermore the company may recuperate what they had paid the restricted/disqualified person. If that company is wound up as insolvent they may be held personally liable for the debts of that company....