Disqualifying Directors in the EU

Abstract

Many Member States have rules in place to ensure that those who have acted as a director of a company and who have proved to be unfit to carry on the business of a company are disqualified from acting as directors for a given period. Due to the financial crisis, the number of insolvencies has increased in recent years and so has the number of disqualification orders. Disqualification orders seem to be a more common sanction for unfit directors than civil suits. Today it is becoming easier to incorporate a company in another Member State, so it is relevant to ask whether the rules on disqualification take into account the increased mobility of the internal market. This paper analyses how the rules on the disqualification of directors in Denmark, Germany, Norway, Sweden and the United Kingdom deal with the consequences of mobility in the internal market. More specifically, this paper analyses whether it is possible to disqualify directors who manage or have managed foreign companies and whether it is possible to enforce a disqualification order against someone who intends to use a foreign company as a vehicle for a business venture.

It is concluded that the national disqualification rules deal in part with the challenges of the internal market. The rules do allow for the disqualification of directors of foreign companies, but the imposition of a disqualification order will normally be conditional on it being possible to initiate insolvency proceedings. Since there is a presumption that the courts in the Member State in which the company is incorporated have jurisdiction to initiate insolvency proceedings, this may not be possible. The Member State of incorporation is more likely to have jurisdiction, but problems of proof and the lack of an incentive may make it less likely that insolvency proceedings will be initiated there. If a disqualification order is made, the Member State will also prohibit the disqualified person from being registered as a manager of a branch of a foreign company. However, apart from in Denmark, a disqualification order does not extend to preventing a person from being a director of a company which is not active in the Member State in which the order is made. So far there has been no harmonisation for ensuring the mutual recognition of disqualification orders, and the Member States have made little attempt to achieve this. In fact, despite the suggestions of both the European Parliament and the Reflection Group, there is not even a Union-wide system of online access to information about disqualified persons. This makes it easy for disqualified persons to get round disqualification orders by becoming directors of companies in other Member States. While an individual Member State may export its problem in this way, such a solution does not sit well with the concept of the internal market.

Keywords: Disqualification, directors

JEL Classification: K22