Post on 24-Dec-2015
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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
Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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
Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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
Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
Procedures for disqualification 2• Problems with EHRC
• Who decides?CourtsDisqualification undertakings (UK)
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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
Consequences of disqualification 3 (continued)
• PeriodsUK: 2-15 yearsNO: 2 yearsDK: 3 yearsSE: 3-10 years
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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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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Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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
Disqualifying directors in the EUKarsten Engsig Sørensen
Dubrovnik April 2013
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