1. Directors’ liability and disqualification 1.1 INTRODUCTION This part of the study deals with the liability of directors and their pos- sible disqualification from acting as directors, or in some other capacity. Directors, whether a one-tier board or a two-tier board approach is embraced by a jurisdiction, are critical to the lives of companies. One- tier boards involve a single board of directors consisting of both executive and non- executive directors, and with a two- tier board system there are two boards, a Board of Management and a Board of Supervision. Both types of approach are used across the European Union. Some Member States prescribe the use of two- tier boards,1 some prescribe the use of one- tier boards,2 and others permit either approach to be employed.3 The direc- tors will oversee the management of the company’s affairs and make the most important decisions for the company, including designing strategy for the businesses the company owns; entering into transactions that involve the borrowing of funds; the sale of assets; the purchase of property necessary for the carrying on of business and the sale of what the company produces whether it be goods, services, technical advice or a combina- tion of these. Importantly, directors formulate a particular strategy and then commit the company to it as well as determining how that is to be achieved. If the company has setbacks or experiences financial difficul- ties, the directors are the ones initially who have to decide what course of action needs to be adopted. When a company is in financial difficulties then, as a matter of practical necessity, directors usually have to take some action to address the issues 1 Such as Germany and Austria. 2 Such as Ireland and the United Kingdom. 3 Such as France and the Netherlands. For further discussion of the types of boards and their structure, see C. Gerner-Beuerle, P. Paech and E. Schuster, Study on Directors’ Duties and Liability (prepared for the European Commission, London, LSE, April 2013), pp. 211–12 available at http://daccess-dds- ny.un.org/ doc/UNDOC/LTD/V13/807/89/PDF/V1380789.pdf?OpenElement. 24 Gerard McCormack, Andrew Keay and Sarah Brown - 9781786433312 Downloaded from Elgar Online at 10/05/2021 04:28:56PM via free access McCORMACK_9781786433305_t.indd 24 12/12/2016 10:49 Directors’ liability and disqualification 25 facing the company. Directors will have to engage in robust management and often have to make difficult decisions to ensure that the company survives.4 Legal systems have prescribed, in different ways, what directors should do when a company is near to or actually insolvent and this report explores these various approaches. The World Bank, in its report titled Principles for Effective Insolvency and Creditor Rights System,5 made it plain that laws governing director and officer liability for decisions det- rimental to creditors made when an enterprise is in financial distress or insolvent should promote responsible corporate behaviour while fostering reasonable risk taking. At a minimum, standards should hold manage- ment accountable for harm to creditors resulting from wilful, reckless or grossly negligent conduct. We can see a response to these concerns in the laws of the EU Member States. If they are involved in an insolvent company or precipitated the insol- vency of the company, the directors might be disqualified from holding office as a director in existing and/or future companies or other offices in society. The disqualification might be seen as a protection of creditors and also, in some Member States, as a further penalty for a criminal offence. Regimes seem to exist in order to protect creditors by seeking to deter directors from acting wrongly and ensuring that miscreants are not, during the term of the disqualification, able to cause harm to other creditors.6 In its 2003 Action Plan, the European Commission stated its intention to propose a Directive to increase the responsibilities of directors which would include director disqualification.7 But this did not occur, notwith- standing support at the public consultation stage. In 2006, the European Parliament proposed that the Commission should posit measures to enhance the cross- border availability of information on the disqualifica- tion of directors.8 This was consistent with the suggestion made by the 4 UNCITRAL, ‘Directors’ Obligations in the Period Approaching Insolvency’ in Legislative Guide on Insolvency Law (Working Group V, 43rd session, New York, 15–19 April 2013), p. 5, available at http://daccess- dds- ny.un.org/doc/ UNDOC/LTD/V13/807/89/PDF/V1380789.pdf?OpenElement. 5 World Bank, Principles for Effective Insolvency and Creditor Rights System (2001) B2 (p. 13). 6 K. Sorensen, ‘Disqualifying Directors in the EU’ in Hanne S. Birkmose, Mette Neville and Karsten Engsig Sørensen (eds), Boards of Directors in European Companies. Reshaping and Harmonising their Organisation and Duties (London, Wolters Kluwer, 2013), p. 335. 7 Modernising Company Law and Enhancing Corporate Governance in the European Union: A Plan to Move Forward, COM(2003)284 final, p. 16. 8 Resolutions on recent developments and prospects in relation to company law (2006/2051(INI)), para. 18. Gerard McCormack, Andrew Keay and Sarah Brown - 9781786433312 Downloaded from Elgar Online at 10/05/2021 04:28:56PM via free access McCORMACK_9781786433305_t.indd 25 12/12/2016 10:49 26 European insolvency law Reflection Group on the future of EU company law.9 It was noted by the Group that the increase of cross-border mobility of companies did lead to the risk that those who are subject to sanctions in one Member State could simply continue their improper activity in another Member State. Therefore, it called for greater access to information on the disqualifi- cation of directors. The Commission has endeavoured to broaden dis- qualification throughout the EU, and thus promote mutual recognition.10 This has been difficult to achieve because of the diverse disqualification rules of the Member States and because of issues relating to the rights of individuals. One problem that often presents itself in addressing the issue of dis- qualification is that it falls into a grey area, somewhere between company law and insolvency law. In this report the focus, as far as disqualification is concerned, is on the breach of insolvency- related duties that might lead to disqualification.11 1.2 WORK UNDERTAKEN BY UNCITRAL In recent years Working Group V (Insolvency Law) of the United Nations Commission on International Trade Law (UNCITRAL) has been studying the obligations that might be imposed on directors in the period approaching insolvency or where insolvency becomes unavoid- able. As part of the study, the Working Group has sought to identify the options that are available when a company is in the vicinity of insolvency in order to inform policy-makers as they seek to devise appropriate legal and regulatory frameworks.12 The Group has referred to, and engaged in some examination of, the developments in some jurisdictions which have involved the shifting of directors’ duties when insolvency is near or actual, and which are discussed in this report.13 The work of the Group 9 Report of the Reflection Group on the Future of EU Company Law (5 April 2011), pp. 34–5. 10 Green Paper on the Approximation, Mutual Recognition and Enforcement of Criminal Sanctions in the European Union, COM(2004)334 final, p. 24; and see similarly Preventing and Combating Corporate and Financial Malpractice, COM(2004)661 final, p. 11. 11 Sorensen, ‘Disqualifying Directors in the EU’ (n. 6 above) 336. 12 The latest was UNCITRAL, ‘Directors’ Obligations in the Period Approaching Insolvency’ (n. 4 above). 13 It has not clearly endorsed the approach although there are comments in recommendations that suggest that the Working Group seem to think that it needs to be considered: ibid. 14–15. Gerard McCormack, Andrew Keay and Sarah Brown - 9781786433312 Downloaded from Elgar Online at 10/05/2021 04:28:56PM via free access McCORMACK_9781786433305_t.indd 26 12/12/2016 10:49 Directors’ liability and disqualification 27 has been brought together in Part 4 (‘Directors’ Obligations in the Period Approaching Insolvency’) of UNCITRAL’s Legislative Guide on Insolvency Law (2013).14 1.3 DUTIES OF DIRECTORS This section addresses the duties of directors and the liability that might emanate from the breach of such duties. ‘Duties’ is interpreted in a broad way in the discussion and was the way that national reporters had con- sidered it in their reports. Duties are invariably prescribed by statute, but some other duties may be provided for in judicial precedents, the company’s constitution or pursuant to contracts between directors and their companies. Some of the consideration of duties in our study overlaps with, and builds on, the work done for DG Justice by a team from the London School of Economics in 2013.15 This latter study focused solely on directors and board structure and did not consider insolvency save where it was related to a discussion of the duties of directors. The discussion in our report focuses on insolvency-related duties and does not really engage in consideration of duties that are only applicable to solvent companies. As we will see, in many Member States some of the duties of directors remain the same whether a company is solvent, near insolvent or actually insolvent. Our study sought to ascertain the duties owed by directors across the EU and principally when directors’ companies were insolvent or nearing insolvency. As directors are so crucial to the running of companies, cor- porate law lays down certain duties that regulate how the directors are to conduct themselves in carrying out their functions and powers.