Thursday, 21 November 2013

What happens if the Secretary of State is unreasonable when negotiating the period of my Undertaking?

It has been known for the Secretary of State to take an unreasonable view on the length of any proposed disqualification by way of Undertaking. In those circumstances, it is open to a Defendant to make an offer in an open letter setting what he/she believes to be a reasonable period and then ultimately leave it to the Court to determine the issues and whether the Secretary of State is being unreasonable. 

However, there is a significant degree of risk in taking this course of action as ultimately, should the individual be unsuccessful then he/she will be liable to pay the legal costs of the Secretary of State. 

It is an unfortunate truism that the Secretary of State often has “deeper pockets” than most individuals and as such, can put pressure on people to accept lengthier periods of disqualification than they may otherwise have done had they had the means to fight the case. 

However, it is always possible to seek leave to remain being a director despite disqualification and we would refer you to other tips booklets on our site dealing with this. 


Is a disqualification undertaking a complicated document?

A Disqualification Undertaking is a relatively simply document, no more than 2-3 pages long. The front page sets out the length of time you will be prohibited from being a director and the activities you are not allowed to carry out whilst the order is in place. 

At the bottom of the page is a section for a person to sign the document agreeing to its terms. There is also a box which the Secretary of State then countersigns.

The second page then has what is known as a “schedule of unfitness”. This is simply a summary of the matters which gave rise to a person being deemed unfit to be a director of a company moving forward. 

This schedule is attached to the disqualification undertaking purely for the purpose of any related proceedings.

It is sometimes possible to amend the wording in the schedule of unfitness, although it is not easy to do. However, it can be beneficial in circumstances where a director later wants to seek permission to become a director again or remain a director of his/her current company. A court dealing with any application for permission to remain a director will review the wording of the undertaking. The less “prejudicial” it is, the better the chances of seeking permission. 


When does a disqualification undertaking take effect?

Ordinarily a Disqualification Undertaking takes effect 21 days after the date it has been accepted by the Secretary of State. 


Can the period of undertaking offered be reduced downwards?

It is always possible (and sensible) to try and negotiate the period offered by the Secretary of State downwards. 

The best way to negotiate a period downwards is by producing a detailed written response backed by documentary evidence countering the allegations made. If this can be produced, then there is the opportunity to negotiate the period of disqualification downwards – although this is not always guaranteed. 


At what stage can a Director Disqualification Undertaking be given?

An undertaking can be given either before or after the issue of formal legal proceedings by the Secretary of State. 

Prior to issuing of proceedings

As set out already in this blog, before issuing formal proceedings, the Secretary of State will send a section 16 letter to an individual asking whether he/she will agree to give a voluntary undertaking not to act as a director

It is of course open to that person to challenge the appropriateness of the threatened disqualification by defending the formal legal proceedings, but if the person is unable or unwilling to fight a claim (for example due to financial reasons), then he/she can sign a Disqualification Undertaking which would mean that formal legal proceedings are no longer necessary. 

The question of costs is important as if a Disqualification Undertaking is given by a person prior to the issue of legal proceedings, the Secretary of State will nearly always waive any claim for payment of its legal costs. It is often the “carrot” the Secretary of State dangles to get people to sign disqualification undertakings.

After the issue of proceedings

A disqualification undertaking can be given by a person after the issue of legal proceedings as well. Indeed it can be given at any time up to and including trial of the claim (or even during the trial, although not recommended). 

However, it is important to understand that if a disqualification undertaking is given after the issue of legal proceedings, the person nearly always becomes liable for the Secretary of State’s legal costs up to and including the time it is accepted (although very early on the Secretary of State may waive any such costs to conclude matters quickly). 

However, for tactical reasons, a person might want to simply “buy time” and give an undertaking nearer to trial.  For example, a person might want to prepare his/her current business for sale – something which might only be possible whilst they remain a director. It must be remembered that even where formal proceedings have been issued, a person can remain a director of a business.  It isn’t until a formal court order is made, or a disqualification undertaking accepted, that a person has to cease to be a director. A case can take up to 2 years to reach a formal trial – 2 years in which a person can reorganize his / her affairs.  


How are Director Disqualification Undertakings offered?

Ordinarily, the Secretary of State (or its lawyers) will write to an individual whom they believe should be disqualified giving them the choice of accepting a voluntary undertaking to be disqualified instead of dealing with the matter by issuing formal legal proceedings. 

These letters are commonly known as Section 16 letters as they are written pursuant to Section 16 of the Company Director Disqualification Act 1986. A section 16 letter will summarise the nature of the allegations against an individual and then offer a period of voluntary disqualification (ranging between 2-15 years for Section 6 disqualification claims) which can be accepted by the individual in lieu of formal legal proceedings. 

A section 16 letter is normally accompanied by various information booklets on the effect of disqualification and outlining the various procedures and options open to that individual if they wish to continue acting as a director despite the disqualification undertaking.  This is most commonly referred to as seeking leave under Section 17 of the Company Director Disqualification Act 1986.


What Conditions need to be satisfied before the Secretary of State can accept a Director Disqualification Undertaking?

There are 2 main conditions:-

1. The Secretary of State must be satisfied that the person offering the undertaking is or has been a director of a company which has at any time become insolvent and that the conduct of that person as director of that company makes him unfit to be concerned in the management of a company.

2. Secondly the Secretary of State must believe that it is in the “public interest” that he should accept a Disqualification Undertaking instead of applying or proceeding with an application for a formal Disqualification Order. 

In reality, the Secretary of State will nearly always accept a voluntary undertaking if one is offered, as it is in the public interest to limit the risk of court proceedings, the legal costs involved and the cost-benefit of issuing a disqualification claim.  However in some circumstances, the Secretary of State may consider it is in the public interest for the individual to be disqualified in open court proceedings.  This is usually in circumstances where there is a high profile matter or some other public interest reason for the claim to be dealt with at court (which is highly unusual).


Periods of Disqualification

The maximum period which a director can be disqualified by way of undertaking is 15 years. The minimum period under Section 6 is 2 years (there is no minimum period under section 8). 

With regard to Section 6 disqualifications, there are 3 distinct “brackets” of disqualification within this range.

2-5 years - this is known as the “lower bracket” 
6-10 years - this is known as the “middle bracket” 
11-15 years - this is known as the “higher bracket” 

Subject to the “gravity” of the offences giving rise to the allegations of unfitness, an individual will face disqualification in one of those 3 categories. 

If a person who is already subject to an undertaking or formal court imposed Disqualification Order then agrees to a further voluntary undertaking for a second “offence”, the Order shall run concurrently (Section 1A(3) of the Company Director Disqualification Act 1986). 


Disqualification Undertakings – the present law

The present law is enshrined in Section 1A(1) of the Company Director Disqualification Act 1986. 

Section 1A(1) enables a person to give an undertaking meaning that that he/she:

(a) 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 unless (in each case) he has permission of the Court, and 

(b) will not act as an insolvency practitioner. 

Disqualification undertakings are only available where disqualification proceedings are proposed following the insolvency of a company (Section 6 of the Company Directors Disqualification Act 1986) or following an investigation of a company by the Secretary of State (Section 8 of the Company Directors Disqualification Act 1986).  Disqualification undertakings are more commonly entered into in the first situation.

The Background to the Disqualification Undertaking Regime

Disqualification Undertakings came into force on 2 April 2001 as part of the Insolvency Act 2000. 

Prior to this time a person facing disqualification could not be disqualified without there being a formal Court hearing. This was even true where a person was prepared to consent to being disqualified voluntarily. The Company Director Disqualification Act 1986 simply did not cater for any form of voluntary disqualification. 

This made it both expensive and time consuming for people who were prepared to accept a disqualification on a voluntary basis – either because they were unwilling or unable to contest the legal proceedings which they faced. 

In recognition of this problem, a new streamlined method for enabling a person to agree to a voluntary disqualification was introduced in 2001. 






Tuesday, 12 November 2013

FAQ - Does it make a difference if the individual pays back the money the liquidated company owed to either HMRC or the Creditors?


The answer is No. 

Director Disqualification proceedings relate to the conduct of the individual at the time and later repayment of outstanding monies makes little if any difference to whether a claim is commenced or not.  Bluntly, the person is better off spending your money defending the claim – assuming he/she has grounds to do so.  


FAQ - What will it generally cost a person to contest disqualification proceedings?


As long as a person deals with matters early, costs can be limited.  The golden rule is that the earlier a person deals with a threatened claim, the cheaper it is. Ignoring threatened claims is ill advised as they are unlikely to be dropped and the person could, if formal proceedings are issued, be faced with paying the Secretary of State’s legal costs. 

However, as a director of a company, an individual does have statutory duties to cooperate with the Secretary of State and the Official Receiver in respect of these enquiries and accordingly they cannot be ignored.  The most important approach to take is to obtain proper advice before sending off any responses. The longer a person leaves these claims, the more expensive they can become and the worse that person’s/your prospects of getting rid of them.

Once disqualification proceedings have been commenced against a director, a decision which normally arises following a detailed review of the strength of the case by government departments, the only choices he/she will have will be to either provide a disqualification undertaking or contest the disqualification claim.  

The former route of an undertaking is undoubtedly cheaper than defending a case. However, by defending a case, the person maximises his/her chances of not being disqualified at all. 


FAQ - Can a person lower the period he/she has been disqualified for?


A director can, pursuant to section 8A of the Company Director Disqualification Act 1986. 

FAQ - Is it easy to find out if someone is subject to a director disqualification order?


Once disqualified, that individuals details will appear on a public register (available online) maintained by Companies House.  This register is not the easiest to find but is available publicly and is therefore accessible to anyone who is looking up these details.  They will normally just need a person’s full name and date of birth (unless the name is unusual) to find out details of the start and end date for the disqualification.  Financial institutions are increasingly using this information as part of their credit check in respect of business lending (although from a sole trader/partnership point of view this is not normally the case). 

FAQ - What is the average length of a director disqualification order?


At present the average length of a director disqualification is 6.2 years – this is the middle bracket of disqualification periods. 

FAQ - How many people are disqualified each year?


The number of disqualifications goes up and down each year. The recent statistics are as follows:

Year         Number of Director Disqualification Orders

2008-2009 1204
2009-2010 1321
2010-2011 1373
2011-2012 1100
2012-2013  969


FAQ - Does agreeing to a director disqualification undertaking open that person up to other potential claims?


The disqualification order or (if a person voluntarily enter into it) undertaking is only there to deal with the disqualification claim. If there are other claims which may be bought against a person in respect of the liquidated company, then the liquidator will need to prove these claims in their own right. A liquidator cannot rely on the fact of a disqualification to try and bring other claims against an individual.

However, it is important to be aware that the disqualification undertaking/order is publicly advertised at Companies House and thus in any other proceedings it can be referred to by way of evidence of misconduct.  It is not unusual for liquidators with claims against directors to wait for the director to be disqualified to further bolster his/her claim against that person.  This may not in proceedings be that effective, but will certain give them the edge in any negotiations with a person. 

There are a wide range of claims which a liquidator may wish to bring against former directors or managers of businesses. 


FAQ - If an individual is not involved in a business any more, does it really matter how long that person is disqualified for?


If an individual is no longer involved in a business, then that person might not be too concerned how long he/she is disqualified for. However, it is always worth trying to lower the period of disqualification as much as possible. 

That person’s circumstances might change and he/she might want to become a director or involved in the management of a business again at a later date. If that is the case that person will either have to wait for the period of disqualification to expire, or make an application to court for permission to become a director

(i) The longer the disqualification period, the longer that person will have to wait for it to expire and the more serious the director disqualification period will impact on that person.

(ii) The longer the period, the more difficult it is to obtain permission from the court to become a director despite having been disqualified (although not impossible).

FAQ - What is a voluntary undertaking?


A voluntary undertaking is a simple procedure designed to streamline the disqualification process [section 1A of the Company Directors Disqualification Act 1986]. Essentially a person agrees not to act as a director for a set period of time based on a schedule of “agreed” unfit conduct in the liquidated company giving rise to the disqualification.  


FAQ - If an individual doesn’t have much money to spend on legal fees, is there a quick way of dealing with a threatened claim?


The answer is yes. 

There is a process by which a “voluntary undertaking” can be given to the Secretary of State not to act as a director for an agreed period of time. 


FAQ - What happens if the Secretary of State misses the 2 year limitation period to issue legal proceedings?



If a director disqualification claim is not started within this time it is highly unlikely that any claim can be brought as leave of the court is then required and this is not often given. Very good reasons will have to be given by the Secretary of State for missing the 2 year time period.


FAQ - How long has the Secretary of State got to bring a claim against a person for director disqualification?



The Secretary of State can take 2 years from the date of insolvency to disqualify a director  – this is either the date when the company was placed into liquidation (by a winding-up order or a meeting of creditors) or the day an Administrator/Administrative Receiver was appointed. 



FAQ - Can a disqualification order be limited to certain areas / tasks?


(i) No. Partial or conditional disqualification is not permitted. The court only has jurisdiction to make a “complete” disqualification order.

(ii) In addition, the court cannot unilaterally decide to exclude a particular company from the terms of the order.  It is absolute and covers all companies.

Thursday, 7 November 2013

FAQ - What happens if a disqualified director didn’t realise he/she was taking part in the management of a company?

It doesn’t matter – that person is still liable. The offence is what is known as a “strict liability offence”. What that person thought he/she was doing at the time is of no relevance.

FAQ - What happens if someone else acts on a disqualified director’s behalf?


That person can be disqualified as acting as a director and can face a fine or imprisonment.

FAQ - What happens if a disqualified director breaches a Director Disqualification Order?


If a person acts in breach of your director disqualification order, the penalties can be severe.

 It can lead to imprisonment for up to 2 years and / or a fine [section 13 of the Company Director Disqualification Act 1986].
 You can be held personally liable for the Company’s debts for the time you acted in breach of the disqualification order [section 15 of the Company Director Disqualification Act 1986].

Tuesday, 5 November 2013

FAQ - What misconduct can give rise to a finding of “unfitness” (and thus disqualification) pursuant to section 6 of the Company Director Disqualification Act 1986?


Whilst not exhaustive, the following are common grounds in alleged unfitness (disqualification) in respect of the liquidated company:

(i)      Failure to keep maintain, preserve or deliver up proper accounting records;

(ii)     Failing to prepare/file annual accounts or any other statutory returns to Companies House;

(iii)    Failing to deliver up company documents and property;

(iv)    Conducting a policy of deliberately not paying HMRC debts;

(v)    Trading to the detriment of creditors generally or specific creditors – this normally involves demonstrating a policy of non-payment of certain creditors;

(vi)    Misapplication or retention of company money or property, either for less than the market value or for no consideration;

(vii)     Paying one creditor in priority to others when insolvency is imminent;

(viii)    Trading in breach of legal and regulatory requirements – for example being involved in financial services schemes without having proper authority to provide such services by the FCA;

(ix)      Wrongful trading of the company [Section 214 of the Insolvency Act 1986];

(x)      Fraudulent trading  [Section 213 of the Insolvency Act 1986];

(xi)     General public interest breaches including mis-selling or misrepresenting sales to customers.


FAQ - What type of behaviour can give rise to a director disqualification order being made?



There are a number of different grounds under the Company Director Disqualification Act 1986 which can lead to the making of a director disqualification order:

(i)     If you are convicted of an indictable offence (i.e. a criminal offence) in connection with the running of a company, this can also give rise to a disqualification as well as any criminal conviction [sections 2&5 of the Company DirectorDisqualification Act 1986]. 

(ii)     If a company persistently breaches company’s legislation e.g. failing to file returns or other documents at Companies House. This again can lead to a director disqualification order against a director or manager [section 3 of the Company Director Disqualification Act 1986].

(iii)     If in the course of winding up a company it appears that a person has been guilty of an offence of fraud, this can lead to director disqualification order [section 4 of the Company Director Disqualification Act 1986].

(iv)     Unfit conduct by the directors in the former company is the most common ground leading to a director disqualification order being made [section 6 of the Company Director Disqualification Act 1986]. 

FAQ - Is there any way a person can act as a director or be involved in the management of a Limited Company once subject to a director disqualification order?


A person can act as a director, yes, but only if leave or permission is given by the court for a director to do so.  This is specifically provided for under Section 17 of the Company Directors Disqualification Act 1986, but is subject to a rigorous process.

This is a separate application and requires expert legal advice to succeed. 

FAQ - Can a person act as a sole trader or partner if subject to a director disqualification order?


Yes. The Company Director Disqualification Act 1986 only applies to directors and managers of companies, Limited Liability Partnerships and certain Charities.

A person can be a sole trader or partner. 

FAQ - Which of the three categories of disqualification period can a director expect to end up if a director disqualification order is made?


Disqualification length depends very much on the “gravity” of the offence and subjective matters such as the losses of the company, the value of creditors claims, any evidence of a deliberate intention to defraud creditors (or any other members of the public), the degree of documentary evidence in support of such allegations and any breaches of other regulations (for example financial services breaches). As a rule of thumb, allegations involving any form of dishonesty will attract the longest periods of disqualification

FAQ - How long does a director disqualification order last for?



Director Disqualification has three distinct bands:

(i)            A lower category of 2-5 years.

This largely relates to reckless or negligent conduct as a director in breach of his director responsibilities.

(ii)           A mid category of 6-10 years.

This is classed as serious, and relates to conduct which is more directly prejudicial to the public interest.

(iii)          The highest category of 11-15 years.

This conduct is the most serious and generally relates to fraudulent or otherwise serious (sometimes criminal) behaviour. 

FAQ - What is meant by being involved in the “management” of a company?

The meaning has been interpreted extremely widely. There are no hard and fast rules as to what it means as every business is run differently. The courts look at matters on a case by case basis to determine whether a person’s role is effectively involved in the management of a business rather than that of an employee.

However, there are indicators that a person is acting beyond the remit of a mere “employee” and is effectively involved in the management of a business:

(i)            Being a signatory on the company bank account;

(ii)           Attending board meetings;

(iii)          Being involved in strategic planning;

(iv)          Being the “go to” person for customers and clients;

(v)           Otherwise making decisions that no other person can make and/or having no one to account to.