Director Disqualification Proceedings | Why Company Directors May Use Voluntary Undertakings
Director disqualification, as set out in the Company Directors Disqualification Act 1986 (‘the Act’), serves to protect the public interest by preventing further misconduct on the part of an offending director. It does so by imposing a period during which the individual is disqualified from holding any office within a corporate body.
Whilst the vast majority of such proceedings arise from findings of misconduct within a company’s management by the liquidator, there are other circumstances in which the Secretary of State may decide to initiate disqualification proceedings.
As an alternative to commencing proceedings, the defaulting director(s) may be given the opportunity to provide a Disqualification Undertaking by the Secretary of State, which will be effective for the stipulated period.
Tim Thompson of KANGS explains the nature of these proceedings.
Director Disqualification | The Relevant Law
The Act provides as follows.
S.1 Disqualification orders:
A court may make a Disqualification Order for a specified period whereby that person:
- shall not be a director of a company, act as a Receiver of a company’s property or in any way, whether directly or indirectly, be concerned, or take part, in the promotion, formation or management of a company, without leave of the court, and
- shall not act as an insolvency practitioner.
S. 1A Disqualification undertakings
In circumstances specified in the Act, a Disqualification Undertaking may be given by the person who is the subject of the proceedings that, for an agreed specified period, that person will:
- not be a director of a company, act as a receiver of a company’s property or, in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, without leave of the court and
- will not act as an insolvency practitioner.
Note:
- ‘whether directly or indirectly’ is designed to prevent the abuse of the process by so called ‘shadow directors,’ i.e. those hiding, but still controlling, behind others ostensibly in control.
- the minimum period of disqualification is set at two years with a maximum of fifteen years.
- the Disqualification is recorded on a Disqualified Directors Register.
Conduct Likely to Lead to Disqualification
In reality, any conduct that is contrary to the honest and legally acceptable management of a company, which results in financial loss to any third party, may potentially lead to disqualification.
In relation to company insolvency, amongst many examples, regular circumstances are:
- abuse of a director loan account, such as by the improper withdrawal and transfer of funds,
- engaging an existing company in any form of fraudulent activity,
- promoting a new company for the sole purpose of criminal activity,
- failure to pay creditors, particularly, HMRC,
- breaching financial service regulations.
The Secretary of State may be involved, where for example:
- a company has been wound up in the Public Interest,
- a director is subject to a substantial bankruptcy,
- criminal convictions have occurred,
- substantial breaches of the Companies Acts have occurred in company administration.
What are the Potential Consequences of Director Disqualification?
Apart from being prevented from participating in any form of involvement in the running of a company, a Director Disqualification may:
- seriously damage reputation,
- affect credit rating,
- prevent the holding of shares in a company,
- hinder employment opportunities.
Further points of significant importance are that a disqualified director may:
- become personally liable for certain company debts,
- be ordered to pay compensation to creditors who have suffered loss arising from the misconduct.
What are Voluntary Disqualification Undertakings?
Where it appears to the Secretary of State that the conditions in section 6(1) of the Act are satisfied, and that it is expedient in the public interest, the defaulting director will generally be encouraged to offer a Voluntary Disqualification Undertaking rather than the need to apply or proceed with an application for a Disqualification Order.
An undertaking is the administrative equivalent of a Disqualification Order but obtained without the need for court proceedings.
To encourage the director to accept a Voluntary Disqualification Undertaking, he may be warned of the risk of an Adverse Costs Order if the offer is refused and formal proceedings become necessary.
When given the opportunity to offer a Voluntary Undertaking, a director should immediately seek legal advice to consider the alternatives available.
When considering whether or not to offer an Undertaking, the opportunity may be available to:
- challenge the facts and allegations with a view to seeking no disqualification,
- present mitigating circumstances,
- show the absence of any dishonesty or personal gain.
- engage pro-actively with the Insolvency Service which may demonstrate co-operation and good faith which the Insolvency Service and courts may view favourably,
Opposing an Application for a Disqualification Order
Given that the Application will be based on the Liquidator’s investigation of the failed company’s affairs, any opposition will require strong rebuttal evidence to succeed. Nonetheless, it is often the case that not all allegations are sufficiently robust to justify the making of a Director Disqualification Order.
The grounds of opposition are likely to include:
- the factual bases of the claims are incorrect or have been misinterpreted,
- the director’s role or responsibility was not as alleged,
- disqualification is disproportionate in the circumstances.
How Can We Assist?
If disqualification proceedings are going to be issued against a director, the Secretary of State will issue a section 16 letter which will outline the allegations of the alleged misconduct, confirm the intention to issue proceedings, and indicate the period of suspension sought.
If the section 16 letter is ignored, disqualification proceedings will be commenced.
The team at KANGS have extensive experience in managing all aspects of company liquidation and its consequences, including director disqualification. Our proven history shows that a prompt and proactive response to a section 16 letter can positively influence the outcome.
If you have received correspondence from the Insolvency Service or are concerned about potential disqualification, contact our team today for clear and confidential legal support.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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