TATIONpRÆSEN Dubrovnik, April 2013 Disqualifying directors in the internal market of the EU Karsten Engsig Sørensen, Professor, Dr.Jur., Department of

TATIONpRÆSEN

Dubrovnik, April 2013

Disqualifying directors in the internal market of the EU

Karsten Engsig Sørensen, Professor, Dr.Jur., Department of Law, Aarhus University

Disqualifying directors in the EUKarsten Engsig Sørensen

Dubrovnik April 2013

The topic• To look at rules on disqualification of directors from a company

law perspective and from a EU perspectiveWhich types of rules exist?Are there cross-border issues which should be dealt with (in the EU)?What role, if any, should the EU have here?

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The presentation• The impact of recent developments

• Harmonization efforts in the EUIn companyOutside company law

• Current national systems UK, Norway, Denmark, Germany, SwedenConditions for disqualification (in cross-border settings)Procedures for disqualificationConsequences of disqualification (in cross-border settings)

• Summing up3



The impact of recent developments• Financial crisis

Has increased the number of bankruptcies and corporate insolvenciesHas increased focus on bankruptcies speculations and reckless

business behaviour

• Increased mobility of companies makes it easy to incorporate abroadMay form a company in the MS with the most attractive rules (e.g.

lowest cost and most flexibility)May use it for business in other MS even without activities in state of

incorporationMany service providers make it easy

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Harmonization efforts in the EU• Not part of the 5th Company Law Directive, but SE Statute Article

47

• Winter report 2002, pp. 69-70Argued that board members’ responsibility for financial and key non-

financial disclosure should be sanctioned properly by MSArgued that directors’ disqualification should be introduced across the EU

Criminal and civil liability sanctions are difficult to effectuate, come to late and differ in various MS

Disqualification from serving as a director of companies across the EU is sanction easier to effectuate and has a powerful deterrent and long-term disabling effect

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Harmonization efforts in the EU 2Call for the Commission to make further review to use disqualification

as a sanction not only for disclosure but also ‘more generally for misconduct by directors

Constitutional aspect should also be examined

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Harmonization efforts in the EU 3• Commission Action Plan 2003 accepted Winter recommendation

but never took any action

• Public hearing positive

• European Parliament Resolution from 2006 calls for measures to enhance cross-border availability of information regarding disqualification of directors

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Harmonization efforts in the EU 4• Reflection Group supports this recommendation

Increased cross-border mobility makes it easy to carry on abuse in other MS

Suggests that information on disqualification is made available to the European public

Suggests that the registers are interconnectedPoints out problems of language, need to specify reasons for

disqualification, need to remove record when disqualification is lifted, problems of privacy, data protection and fundamental rights

• Commission Action Plan 2012, however, did not mention it8



Harmonization efforts in the EU 5• Outside company law

Normally sanctions are left for MS ‘Fit and proper’ rules for directors in financial institutions Combating corruption Abuse of children Violation of competition law?

Promoting mutual recognition of disqualification Little has been achieved Recognition of professional qualifications Driving license

Mutual exchange of information on criminal convictions9



Different disqualification regimes• Criminal law regimes

GermanyStrict requirements as to proof?

• Bankruptcies/insolvency regimes (insolvency quarantine)Main area of application of CDDA 1986 and Swedish rulesRules in Norway and soon DenmarkOften used

• Fit and proper test in EU financial market law and insurance law

• Violation of competition law (UK and SE)

• Others

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Conditions for disqualification 1• Which companies?

Any company with limited liabilityAlso business without limited liability (DK, SE)Also foreign companies, given competence for insolvencies proceedings

Regulation 1346/2000Normally place of registered office, unless centre of main interest is

elsewhereSecondary insolvency proceedings

Consequences of transfer of seat? Does disqualification have to be part of insolvency proceedings?

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Conditions for disqualification 2• Who?

Formal directors (managing and non-managing)De facto directors (% Germany)Disregarding nationality or residenceIn Denmark and Norway it is a requirement that position is held

within the last year before bankruptcy

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Conditions for disqualification 3• Different tests for unfitness

Some common elements (do not stop in time, do not perform duties vis-à-vis accounts, sell business at discount)

Clear focus on owner-managed SMEsIs violation of company law relevant?Is conduct performed outside MS relevant?

Does it matter whether there may be different standards abroad? Problems with proof/investigations Problems with incentives

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Procedures for disqualification 1• Requires insolvency proceedings

• Differs who can start disqualification proceedingsCriminal prosecutor State (UK, SE)Trustee (UK, NO, DK)Court (SE)Shareholders or creditors (UK)Problem if the trustee is the main enforcer?

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Procedures for disqualification 2• Problems with EHRC

• Who decides?CourtsDisqualification undertakings (UK)

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Procedures for disqualification 3• How often is the sanction used?

• UK: More than 1,500 times per year

• NO: 300-400 times per year (10% of all corporate insolvency)

• DK: Expecting same level as in NO

• DE: ?

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Consequences of disqualification 1• Must not be involved in management of a company

Only limited liability companies (however, partnerships covered in SE, DK)

All positions, even de facto

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Consequences of disqualification 2Foreign companies?

In DK also prohibited from being director in a foreign company (enforcement problem)

Must not be a manager of branch of a foreign company (SE, NO, DE) UK: Foreign companies with established place of business in UK,

sec. 22 Duty to register a branch Restricting freedom of establishment

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Consequences of disqualification 3• Must not be an employee in a company where related holds a

position as a manager (SE)

• Must not be involved in establishment of company (% DK)

• Must not be an insolvency practitioner (UK)

• Must not own majority of shares (SE)

• Can get leave from the courts (UK, SE)

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Consequences of disqualification 3 (continued)

• PeriodsUK: 2-15 yearsNO: 2 yearsDK: 3 yearsSE: 3-10 years

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Consequences of disqualification 4• Sanctions

Fines and prisonLonger periodPersonal liabilityLiability for straw men (UK, DK)Consequences of invalid appointment of directorLiability of shareholders (DE)

• Cross-border enforcement

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Consequences of disqualification 5• Register of disqualified persons

UK: Online accessSE/NO: Access on requestDK: No public accessSo far registers are not linked

EP and Reflection Groups proposal Not covered by directive 2012/17 ECRIS – European Criminal Records Information System Data protection

What would be the effect of linked registers?

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Consequences of disqualification 6• Mutual recognition of foreign disqualifications

Ensuring mutual recognition SE Statute Article 47 and SCE Statue Article 46(2) Extending sanctions – limiting free movement Harmonization presupposes similar systems – are they similar

enough?Each MS can choose to do so

UK: CA 2006, sec. 1184 and 1187 (can impose disqualification or personal liability

Can courts in other MS enforce foreign disqualification orders?

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Summing up 1• Current national rules do only to some extent take account of

the effect of the internal marketCannot impose disqualification on directors of foreign companies

unless the insolvency proceedings take place in that MSMS of incorporation may not have proof or incentives to enforce unfit

behavior taking place abroad (requires cooperation) Enforcement of disqualification against foreign companies limited to

situations where branches are registered or bankruptcy proceedings take place there

No setup to exchange information on disqualificationsNo mutual recognition of foreign disqualifications, e.g. disqualified

persons can avoid order by starting business in other MS24



Summing up 2• Mutual recognition would ensure that disqualified persons are

not ‘exported’ to other MS

• Mutual recognition, however, would require some harmonization

• Cross-border transparency less effective but could more easily be achieved

Thank you for your attention!25

Documents

TATIONpRÆSEN Dubrovnik, April 2013 Disqualifying directors in the internal market of the EU Karsten Engsig Sørensen, Professor, Dr.Jur., Department of