Tuesday, 15 October 2013

FAQ - What is the effect of a director disqualification order?

If a director disqualification order is made, a person, cannot, without leave of the court:

(i) be a director of a company;

(ii) be concerned in any way whether directly or indirectly in the promotion formation or management of a company;

(iii) be a liquidator or administrator of a company;

(iv) be a receiver or manager of a company’s property.

Monday, 14 October 2013

Common Mistakes in Director Disqualification Claims - Believing you cannot be a Director / involved in the Management of a Business if Disqualified

A director may have been disqualified sometime in the past and now have a need to act as a director of a limited company.  Alternatively that person may be contemplating offering a disqualification undertaking (or be subject to disqualification proceedings) and seeking a way out whilst remaining as a director of your company.  Alternatively he/she may have taken a new role up and want the Court’s endorsement that he/she is not acting in breach of the disqualification prohibition. 
These problems can be dealt with by seeking leave to act as a director of one or more companies under Section 17 of the Company Directors Disqualification Act 1986, despite having been disqualified.  This can be dealt with to time with the signing of a disqualification undertaking (to ensure continuity) or can be applied for at any time prior to the end of your disqualification.

This is normally commonly available to directors who have been disqualified at the lower end of the disqualification bracket (up to 5 years) but in extenuating circumstances the Court may grant leave for directors who have been disqualified for higher periods.  

Common Mistakes in Director Disqualification Claims - Acting in the Management of a Company

Quite often, upon being disqualified as a director, an individual will take up another role within either an associated company or another company at a senior level on a salary as an employee with the view that s/he is not acting in breach of the disqualification order/undertaking.  However, this is not the case and this area of management is a very grey area where such individuals have been found guilty of acting in the capacity of a director, despite not being registered (a “de facto director”).  With this brings criminal and committal proceedings and the potential liability for the debts of the relevant company as described above.

This is not a risk worth taking and the individual should at least seek professional advice before commencing any such senior role where there is potentially a misconception that he/she is acting in the same capacity as a director.

Common Mistakes in Director Disqualification Claims - Running a Company “behind the scenes”

Some directors believe that they can still run a company despite being disqualified – normally by appointing other directors in their place whilst controlling the company in the background.  This is termed a “shadow  director” and the Insolvency Service and other authorities are well aware of this practice.
These directors fail to realise that being in breach of a disqualification order is a serious offence.  It is a criminal offence.  It can lead to a fine or imprisonment.  It can also lead to that individual director being responsible for the debts of the company going forward (or at least incurred during the period whilst s/he acted as a shadow director). 
The Secretary of State does check whether disqualified directors are acting in breach of the disqualification order and does receive reports from various sources who may be aware of the disqualification order (as it is publicly available information). Rather than risk the draconian sanctions, a director should take advice on his/her options such as seeking permission to remain a director despite the disqualification order having been made (or threatened).
Some directors believe that they can control the company despite disqualification due to the fact that they are the majority shareholder.  This is not permissible.  If a director tries to manage the business in the guise as a shareholder he/she will be acting in breach of the disqualification order with all the serious consequences this can carry and will effectively be acting as a shadow director. Do not risk it.

Thursday, 10 October 2013

Common Mistakes in Director Disqualification Claims - Failure to Negotiate Undertakings

Directors often believe that they can only dispose of a claim on an undertaking basis by accepting the period on offer as set out in the Section 16 letter.  This is not the case. Undertakings can be negotiated downwards, normally following a detailed letter back to the Insolvency Service setting out the grounds for defence.

It is always in the directors’ interest to try and secure the lowest possible period of undertaking. Apart from the obvious fact that the disqualification period itself will be shorter, a reduced period can also assist in seeking permission to remain a director of a company despite being disqualified.  It could have important implications on a person’s future business career.

Common Mistakes in Director Disqualification Claims - Failure to ask for a copy of the draft evidence.

If a director has been served with a “Section 16 Notice” letter indicating an intention to issue proceedings in the absence of giving an undertaking, they should not panic in to giving an undertaking without first understanding the claim against them.
A director is entitled to see a copy the draft affidavit the Insolvency Service will have prepared setting out the basis of the claims and evidence against that person.  In order to issue proceedings, the insolvency Service has to swear a detailed affidavit setting out the various “heads of claim” and the supporting evidence. By the time the Section 16 letter is sent, there should be a draft of that affidavit evidence already prepared. 
A person is entitled to see the draft affidavit, either to help draft a response or to enable that person to seek legal advice.  It is always sensible to do this. The affidavit will set out in far greater detail the allegations against the individual rather than the brief details often given in the section 16 letter. A person can also ask for the supporting documents which go with the draft affidavit evidence and we would always recommend a person does this as well. 
Failure by the Insolvency Service to provide such information can be used against them if they then later issue proceedings without having given a director proper opportunity to consider the evidence and respond accordingly.

Common Mistakes in Director Disqualification Claims - Failing to recognise that the Insolvency Service must adhere to certain time limits

What many directors do not realise is that the Insolvency Service has 2 years from the date of administration/liquidation of the company to commence formal legal proceedings. If they do not they are time barred from bringing a claim without the leave of the court.   Often the Insolvency Service leaves matters late (i.e. shortly before the 2 year deadline) before commencing enquiries of the former directors

However, always remember that the Insolvency Service is obliged to allow individuals sufficient time to respond properly to enquiries. If they have left the matter close to the 2 year deadline and are pressing for a response – this is their fault, not the person they are writing to. That person is entitled to seek sufficient time to respond to what are often comprehensive allegations made against them.

A person should not feel pressured in to giving a quick response due to the Insolvency Service’s slowness in making enquiries. Do not feel pressured in to giving undertakings in return for them not issuing proceedings just because they have left matters close to the 2 year deadline. This is especially true if a person believes he/she has a genuine defence to a claim.  A person is entitled to have sufficient time to respond on such a serious issue.

Common Mistakes in Director Disqualification Claims - Responding without access to relevant Company Documentation

Often directors will respond to enquiries without reviewing relevant company documentation, relying mainly on their recollections of events which can be many years old.

A person is entitled to request access to any relevant documentation which he/she believes will assist in their response.  That documentation will be retained by the liquidator of the company concerned. If the individual needs access to it, they should make sure they ask for it. A person is entitled to ask the liquidator for a complete inventory of all company documentation if they consider this will help identify documentation needed for a response. If the person does this, they should also inform the Insolvency Service what they are doing and that the timing of the reply will depend on access to this information. 

Common Mistakes in Director Disqualification Claims - Feeling pressured to giving a quick response

Directors can often feel pressured to meet deadlines set out in correspondence from the Insolvency Service.  They should not. The Insolvency Service is quick to “impose” deadlines in the hope of obtaining a “hurried” response which can make their task easier, is administratively more convenient and assists with their annual targets. Do not fall in to this trap. There is no legal requirement to respond by the deadlines set out in their correspondence.

Remember that any responses given by a person can (and often is) exhibited to the formal affidavit of the Secretary of State if proceedings are issued. It is vital that any response is carefully considered and well thought out, even if a person decides not to take legal advice.

An individual is entitled to ask for sufficient time to respond. They should not feel pressured in to responding in a hurry.  Hastily put together responses can (and often are) used against directors and damage the prospects of defeating a claim. 

Common Mistakes in Director Disqualification Claims - Avoiding Communications Entirely

Avoiding all communications in the hope that the claim will “go away” is never a good idea. If the Insolvency Service has written to the director making enquiries, the fact is that the person is now “on their radar”. If the person fails to answer any of their letters, it is highly unlikely that they will simply drop the claim. It is better to cooperate with the Insolvency Service and seek to persuade them by detailed correspondence not to continue with a formal claim.