Director Disqualification NI

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1 Directors Agree to Stand Down Six Presbyterian Mutual Society (PMS) representatives have agreed not to act as company directors for periods of up to six years, the High Court has heard. The BBC has reported (10 May 2013) that undertakings given by each of them has led to a resolution of disqualification proceedings. The Department of Trade and Industry (DETI) was seeking to have the men declared unfit to run a company over their alleged role in the PMS. However, a judge was asked to dismiss the case against them by consent. A lawyer for the department said the respondents had given an undertaking not to act as a director for a particular period of time. He said it could accept undertakings when it was "expedient and in the public interest". There were over 3,000 insolvencies in Northern Ireland last year. Of these, 250 were compulsory liquidations and 1,500 bankruptcy orders. Only a small proportion result in action to disqualify directors. (See Appendix I for the legal position with disqualification and insolvency (NI). Shadow Director Under the terms of the settlement Colin Ferguson, who acted as chief executive of the PMS, has agreed to a six-year period. This is interesting because he said to have acted as a shadow or de facto director, by taking part in decisions to approve loans. Four of the directors, David James Clements, David McConaghy, Albert McCormick and Sidlow Samuel McFarland, gave undertakings not to act for four years. The other director, Philip Black, agreed to a three-year period. All 20 of the full Board of PMS were voluntary. DETI had decided it was in the public interest only to seek disqualification orders against six of them. Allegations of Unfitness DETI had made a series of allegations of unfitness against some of the directors. These include that they caused or allowed the PMS to carry on the business of banking contrary to relevant legislation and to accept deposits in breach of the Banking Act It is also claimed that they failed to adequately monitor or control the affairs of the society, and allowed it to make loans of more than 56m to non-members in breach of its rules. They all deny unfit conduct and have filed counter claims as part of their defence. These include: The alleged grounds for unfitness could apply to all of the directors, and by seeking disqualification orders against some but not all, DETI has discriminated and acted with apparent bias and unfairness They also claim that the respondents have been selected as "soft targets", a conflict of interests exists in bringing the disqualification proceedings because the department failed in its own regulatory responsibility to the company and was criticised for doing so by the House of Commons

2 Treasury Committee, and that DETI may have been subject to pressure from elected representatives to bring proceedings. Nearly 10,000 people lost access to their savings when the society entered administration in November A rescue package underwritten by the government and the Northern Ireland Executive was agreed in Previously, a lawyer acting for Presbyterian Mutual Society (PMS) directors had asked the Enterprise Minister if it is in the public interest to continue prosecution of his clients since her department had admitted to failures in overseeing the society. John Gordon was speaking after the Northern Ireland Ombudsman revealed he had found Minister Arlene Foster s department guilty of maladministration in failing to properly scrutinise the internal affairs of the PMS before it suffered a run and went into administration in The Department of Trade and Investment (DETI) has accepted the ombudsman s criticisms, with the department saying it is now taking steps to ensure the situation cannot arise again. It was not found to have caused the PMS collapse. Mr Gordon had said that, DETI has an obligation to continually keep under review whether or not to press ahead with the prosecution of directors. That is a generic requirement in every disqualification process. In all cases it has to decide if it is in the public interest to proceed. DETI is entitled to review the public interest in this prosecution at any time, he added. My clients are under great stress as a consequence of this process continuing and they feel they have been unfairly selected [for disqualification]. Former PMS saver Ivor McCandless said last night he had no desire to see any harm come to PMS directors, nor would he like to see them punished. But I would be very interested to see a number of issues explored in court, he said. I would like to know why they did not seek regulation and I would like to know why DETI has selected six out of some 20 directors to prosecute. What Were the Accusations? In an annex of the DETI case papers the directors were accused of a number of misdemeanours, including causing or allowing the PMS to: Carry on the business of banking contrary to the Industrial and Provident Societies Act. Accept deposits as a deposit-taking business in breach of the Banking Act 1987 and I&PS Act Carry on a regulated activity, namely accepting deposits, without authorisation under Financial Services and Markets Act 2000.

3 Making loans to non-pms-members in breach of PMS rules. Failing to ensure the directors met sufficiently often to control PMS affairs. Pursuing investment/lending policies not consistent with PMS rules. Having a director who was not a member of the PMS. Allowing non-members to borrow money. Allowing non-presbyterians to invest. property lender with a whopping exposure to undeveloped land. Also have a look at the way that in latter years the balance sheet was ballooning in a way that was utterly imprudent and unsustainable. Even if there hadn t been a liquidity crisis there would soon have been a solvency crisis. And that s without even mentioning the fact that the FSA have already found the whole outfit was basically an illegal bank. One commentator has alleged that the PMS was, an out-and-out dog, to an extent that some people still seem unaware of. Pointing to the PMS s filings, freely available on the DETI website, he suggests that, they show that the PMS loan book was an absolute shocker. A little table in the administrator s report tells us their total book at the end was 184m. The column for building sites and development land reads 85m. That s fully 46% of the book accounted for by development land. But there s more. Another 26m was loaned for Buy To Let - 14% of the book. A further 17m for commercial property 9%. However, only 12m was loaned to congregations (7%) and 11m for own homes (6%). The people investing in the PMS probably didn t know it but the directors had built a mono-line

4 Appendix I The Legal Position on Disqualification and Insolvency Service (NI) This section covers general information you may require regarding the directors disqualification process. What is Directors Disqualification? Directors Disqualification is the process whereby a person is disqualified, for a specified period, from becoming a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without leave of the Court. A disqualification order is made by the High Court under the Company Directors Disqualification (Northern Ireland) Order The Order applies not only to a person who has been formally appointed as a director but also to shadow directors, and those people who have carried out the functions of a director. Without specific permission of the Court it disqualifies a person from: becoming a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company being a liquidator or an administrator of a company being a receiver or manager of a company's property Disqualification proceedings are taken under civil law, not criminal law, but a criminal court may also decide to make a disqualification order after conviction for certain criminal offences. An order for disqualification can be made under a number of different Articles of the Company Directors Disqualification (Northern Ireland) Order The order will specify the period of disqualification. For orders made against an unfit director of an insolvent company, there is a minimum period of 2 years and a maximum of 15 years. Undertakings On 5 September 2003 disqualification undertakings were introduced, which allowed directors, with the agreement of the Department, to avoid the need for a court hearing by offering an acceptable disqualification undertaking. This has exactly the same legal effect as a disqualification order made by the court, and will usually include a schedule identifying the directors unfit conduct. The consequences of breaching a disqualification undertaking are the same as those for breaching a disqualification order.

5 When can disqualification occur? When a company has failed, the Official Receiver (or Insolvency Practitioner in a creditors' voluntary liquidation, an administrative receivership or an administration) sends the Department a report on the conduct of all directors who were in office in the last 3 years of the company's trading. The Department has to decide whether it is in the public interest to seek a disqualification order. Any application is heard and decided by the Court. Examples of conduct which may lead to disqualification include: continuing to trade to the detriment of creditors at a time when the company was insolvent failure to keep proper accounting records failure to prepare and file accounts or make returns to the Companies Registry failure to submit tax returns or pay over to the Crown tax or other money due failure to co-operate with the OR/IP. How will I know if a disqualification order is to be sought against me? Notification of a decision to apply for a disqualification order will be sent to the last address provided to the Companies Registry or to the Official Receiver/Insolvency Practitioner. The application for disqualification has to be made within 2 years of the date of the windingup order (or any earlier voluntary liquidation, administrative receivership or administration), unless the Court extends the time. What happens after an application for disqualification is made? The Department files its application in the High Court supported by one or more affidavits containing evidence of unfit conduct of the directors and sends a copy to the directors. The directors will have the opportunity to give the Court explanations or reasons for their actions - and may do so in a replying affidavit. The High Court will then decide whether the conduct makes the directors unfit to act in the management of a company and, if so, for how long they should be disqualified. At any stage in these proceedings you may give an undertaking to the Department of Enterprise, Trade and Investment that has the same effect as a disqualification order and such an undertaking will normally put a stop to the Court proceedings. What Is A Disqualified Director Not Allowed To Do? It is a very serious matter if the Court has made a disqualification order against you or you have

6 given a disqualification undertaking to the Department, which has been accepted. You could go to prison if you contravene the order or undertaking. The order or undertaking will be registered at the Companies House which monitors new directorships and provides details of disqualified directors on request. To understand exactly how the order or undertaking affects you, you should always ask your solicitor or an insolvency practitioner. While the order or undertaking is in force, it stops you acting as if you were a director. So you cannot avoid the order or undertaking by simply changing your job description. The order or undertaking also means that you must not get other people to manage a company under your instructions. The order or undertaking does not stop you from having a job with a company, but unless you have court permission it does stop you: being a director of a company; acting as receiver of a company's property; being concerned in or taking part in the promotion, formation or management of a company and you must not act as an insolvency practitioner. The order or undertaking does not stop you carrying on business as a sole trader or in partnership with others but, unless you have court permission, you must not be a member of or be concerned or take part in the promotion, formation or management of a limited liability partnership. What does 'company' mean? You must not do any of the prohibited acts listed under the previous heading in relation to a company formed in Northern Ireland or in England and Wales, or in Scotland. You must not do any of the prohibited acts in relation to a foreign company if: it is registered here; or it has a sufficient connection here (for example, if it carries on business or has assets here) even if it is not registered here. You must not do any of the prohibited acts in relation to a building society or an incorporated friendly society. You must not hold various other offices, such as the trustee of a charity: always take professional advice first. Contravening the Order or Undertaking If you contravene the order or undertaking you are then committing a criminal offence and you could go to prison for up to 2 years and face a

7 fine. You could also become personally liable for any debts of the company which it incurs while you contravene the order or undertaking. Anybody who acts on your instructions may also be personally liable. You can ask the High Court for permission to become a director of a company or do anything else that the order or undertaking prevents. However, the Court cannot give you permission to act as an insolvency practitioner. You need to satisfy the Court that you have a reasonable need to do what you are asking - not just that you want to do it. You also have to satisfy the Court that, if it gives you the permission you want, the public will be adequately protected. The Court may require safeguards and may impose conditions on you. If you want to ask for permission, you will need to make a formal application to the High Court under Article 21 of the Company Directors Disqualification (Northern Ireland) Order Glossary of Insolvency Terms The following list provides a brief explanation of some of the terms you may come across in insolvency proceedings. Please note that this glossary is for general guidance only. Many of the terms have a specific technical meaning in certain contexts, which may not be covered here. Administrative Receiver I Insolvency Practitioner (IP) appointed in an administrative receivership. In this case the IP is often referred to as the "receiver". Administrator Insolvency Practitioner appointed by the High Court under an administration order. Annulment The repeal of a bankruptcy order by the High Court. Charge Right taken over property by a creditor to protect against default in repayment of a loan (such as a mortgage). Creditor Someone to whom a debt is owed. Debenture Document in writing, usually under seal, issued as evidence of a debt and/or granting security for a loan of a fixed sum at interest. The term is often used in relation to loans (usually from banks) secured by charges, including floating charges, over companies' assets.

8 Debtor Someone who owes a debt. Deed of Arrangement Arrangement (governed by the Insolvency (NI) Order 1989) proposed by the debtor for payments to his or her creditors. It is occasionally used instead of an individual voluntary arrangement, particularly where creditors already agree to the terms of the arrangement and are not likely to take other action to recover their debt. Discharge Process that frees a bankrupt from the restrictions of bankruptcy and releases him or her from most bankruptcy debts. Dividend Sum distributed to each creditor in insolvencies. Fixed Charge Charge held over specific assets. The debtor cannot sell the assets without gaining the consent of the secured creditor or repaying the amount secured by the charge. Floating Charge A charge held over general assets of a company. The assets may change (such as stock) and the company can use the assets without the consent of the secured creditor unless the charge "crystallises" (becomes a fixed charge). Crystallisation occurs on the appointment of a receiver, on the commencement of winding up or as otherwise provided for in the document creating the charge. Interim Order An order of the High Court protecting a debtor from proceedings for a limited period to allow him to make a proposal to his creditors for a voluntary arrangement. Interim Receiver The High Court may appoint the Official Receiver (OR) to act as interim receiver of an individual's property (usually to protect and secure it), after the presentation of the bankruptcy petition but before a bankruptcy order is made. Liquidation (winding up) Applies to companies or partnerships. It involves the realisation and distribution of the assets and usually the closing down of the business. There are three types of liquidation - compulsory, creditors' voluntary and members' voluntary. Liquidator Official Receiver/ Insolvency Practitioner appointed to administer the liquidation of a company or partnership.

9 Member (of a company) A person who has agreed to be, and is registered as, a member, e.g. a shareholder of a limited company. Nominee Insolvency Practitioner who carries out the preparatory work for a voluntary arrangement, before its implementation. Preferential Creditor Creditor entitled to receive payments in priority over other unsecured creditors. These creditors include certain government departments, occupational pension schemes and employees. Proof of Debt Statutory form completed by a creditor to state how much is claimed. The form is supplied by the trustee or liquidator. Provisional Liquidator OR/IP appointed to preserve a company's assets pending the hearing of a winding-up petition. Proxy Form Form, which must be completed if a creditor wishes someone else to represent him or her at a creditors' meeting and vote on his or her behalf. Receiver Commonly used name for an administrative receiver. The term can also mean a person appointed by the High Court or under a charge to receive the rents and profits of property Receiver and Manager When a bankruptcy order is made, the OR becomes receiver and manager to protect the bankrupt's estate. This happens before the OR becomes trustee or before an IP is appointed in his place. Receivership A company in administrative receivership is often said to be "in receivership". Release The process whereby the OR/IP is freed from liabilities as trustee/liquidator or administrator. Secured Creditor Creditor who holds security, such as a mortgage, over a person's assets for money owed. Statement of Affairs Document completed by a bankrupt or company officer, stating the assets and giving details of debtors and creditors.

10 Summary Administration Where a bankrupt has filed his or her own petition and the debts are less than the small bankruptcy level (currently 20,000), the High Court can issue a certificate for the summary administration of the estate. In such cases the OR is not obliged to investigate the bankrupt's affairs and the bankrupt may be discharged after two years. Supervisor Insolvency Practitioner appointed to supervise the carrying out of an individual or company voluntary arrangement. Voluntary Liquidation Method of liquidation not involving the High Court or the OR. There are two types of voluntary liquidation - members' voluntary liquidation for solvent companies or creditors' voluntary liquidation for insolvent companies Winding-Up Order Order of the High Court for the compulsory winding-up or liquidation of a company or partnership. Trustee Person who holds property in trust for another. In bankruptcies the OR (as trustee in bankruptcy) or IP holds the property of the bankrupt in trust for creditors and is referred to as the trustee. Unsecured Creditor Creditor who does not hold security for money owed. Some unsecured creditors may also be preferential creditors. Voluntary Arrangement A means whereby the High Court may allow an individual debtor to put in place a proposal to pay his creditors under the supervision of an IP acting as supervisor.

Assets Anything that belongs to the debtor that may be used to pay his/her debts.

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