Disqualifying directors in the internal market of the EU

1. Disqualifying directors in the internal market of the EU Karsten Engsig Sørensen, Professor, Dr.Jur., Department of Law, Aarhus University

2. The topic • To look at rules on disqualification of directors from a company law perspective and from a EU perspective • Which 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?

3. The presentation • The impact of recent developments • Harmonization efforts in the EU • In company • Outside company law • Current national systems • UK, Norway, Denmark, Germany, Sweden • Conditions for disqualification (in cross-border settings) • Procedures for disqualification • Consequences of disqualification (in cross-border settings) • Summing up

4. The impact of recent developments • Financial crisis • Has increased the number of bankruptcies and corporate insolvencies • Has increased focus on bankruptcies speculations and reckless business behaviour • Increased mobility of companies makes it easy to incorporate abroad • May 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 incorporation • Many service providers make it easy

5. Harmonization efforts in the EU • Not part of the 5th Company Law Directive, but SE Statute Article 47 • Winter report 2002, pp. 69-70 • Argued that board members’ responsibility for financial and key non-financial disclosure should be sanctioned properly by MS • Argued 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

6. Harmonization efforts in the EU 2 • Call 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

7. 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

8. 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 interconnected • Points 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 it

9. 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 convictions

10. Different disqualification regimes • Criminal law regimes • Germany • Strict requirements as to proof? • Bankruptcies/insolvency regimes (insolvency quarantine) • Main area of application of CDDA 1986 and Swedish rules • Rules in Norway and soon Denmark • Often used • Fit and proper test in EU financial market law and insurance law • Violation of competition law (UK and SE) • Others

11. Conditions for disqualification 1 • Which companies? • Any company with limited liability • Also business without limited liability (DK, SE) • Also foreign companies, given competence for insolvencies proceedings • Regulation 1346/2000 • Normally place of registered office, unless centre of main interest is elsewhere • Secondary insolvency proceedings • Consequences of transfer of seat? • Does disqualification have to be part of insolvency proceedings?

12. Conditions for disqualification 2 • Who? • Formal directors (managing and non-managing) • De facto directors (% Germany) • Disregarding nationality or residence • In Denmark and Norway it is a requirement that position is held within the last year before bankruptcy

13. 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 SMEs • Is 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

14. Procedures for disqualification 1 • Requires insolvency proceedings • Differs who can start disqualification proceedings • Criminal prosecutor • State (UK, SE) • Trustee (UK, NO, DK) • Court (SE) • Shareholders or creditors (UK) • Problem if the trustee is the main enforcer?

15. Procedures for disqualification 2 • Problems with EHRC • Who decides? • Courts • Disqualification undertakings (UK)

16. 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: ?

17. 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

18. Consequences of disqualification2 • Foreign 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

19. 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)

20. Consequences of disqualification3 (continued) • Periods • UK: 2-15 years • NO: 2 years • DK: 3 years • SE: 3-10 years

21. Consequences of disqualification4 • Sanctions • Fines and prison • Longer period • Personal liability • Liability for straw men (UK, DK) • Consequences of invalid appointment of director • Liability of shareholders (DE) • Cross-border enforcement

22. Consequences of disqualification5 • Register of disqualified persons • UK: Online access • SE/NO: Access on request • DK: No public access • So 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?

23. Consequences of disqualification6 • 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?

24. Summing up 1 • Current national rules do only to some extent take account of the effect of the internal market • Cannot impose disqualification on directors of foreign companies unless the insolvency proceedings take place in that MS • MS 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 disqualifications • No mutual recognition of foreign disqualifications, e.g. disqualified persons can avoid order by starting business in other MS

25. 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!