Tuesday, 28 January 2014

At what period of disqualification does seeking permission become “impossible”?

There is nothing to stop a person trying to seek leave for any period of disqualification. However, the courts are extremely reluctant to grant permission to a person disqualified for anything over 8 years. Even at 8 years it was only with very stringent conditions attached and it was an unusual case.

It is more likely that permission will be granted for someone in the “lower bracket” of 2-5 years. If a person is being offered an “undertaking” for a period higher than that – he/she might want to consider trying to bring the period of disqualification down in to the lower bracket of 2-5 years as it will allow that person a far better chance if he/she later decides they want to be a director of a business. 

Does it matter how long a person has been disqualified for previously?

Bluntly – yes.  

The longer the period of the original disqualification, the harder it is to get leave. This is due to the fact that the court views a longer period of disqualification as more “serious”. Equally, granting leave for someone disqualified for a long period of time is seen as undermining the “deterrence” factor of the Company Director Disqualification Act 1986. 

Is there a requirement to demonstrate a “need” to be a director in the business when seeking permission?

The strict answer no, but it is something which the court will undoubtedly look at and it is true that the greater a person demonstrates a “need” to be in the business, the more helpful it is for that person’s prospects of success.  

We acted for a director in the case of Re Aitch Holdings Limited [2002] All ER (D) 236 when we successfully obtained leave for our client to remain a director for 17 separate companies in a single application. When giving Judgement, Justice Lloyd did comment on the obvious “need” for our client to remain a director of all 17 companies and the importance of it in the success of the application.

Can the court grant permission for a limited period only?

The answer is yes. It may do this because:

a. It wants to be convinced that the company can trade on a solvent basis in the future and thus allow permission for a short period of time to allow the person making the application time to convince the court that leave should then be granted for the entire period.

b. It might not be sure if the conditions can be complied with and wants the company to try to implement them and then come back to court.

c. It might just allow it to enable the applicant time to complete a single transaction which is important to the company.

Can the conditions in a person’s order for permission be varied at a later date?

Yes – so long as the original order is worded in such a way as to allow this.

However, the court is highly unlikely to allow retrospective variations even though the case authorities suggest it is a possibility.

Can a person remain a sole director of his / her business when seeking permission to remain a director pursuant to Section 17 of the Company Director Disqualification Act 1986?

The answer is no. 

The court will require a co-director of sufficient standing to be appointed – normally a qualified accountant or someone of similar standing. The longer the period of disqualification – the more qualified that person needs to be.

What happens if the breach of condition is not foreseeable?

If the breach cannot be foreseen (eg a fellow director of the business dies unexpectedly), the order will normally allow the person a certain period of time to rectify the matter. However, the person must act promptly to remedy the situation (eg appoint another director in his/her place) whilst the application to court is to be heard.

What happens if the person who has obtained permission thinks he/she is in danger of breaching a court imposed condition of their permission?

If a person can foresee a situation where one of the original conditions of leave will not be possible to continue with, that person must make an application to the court in advance of the change to vary or discharge that particular condition.  

For example, the original condition might relate to a particular firm of accountants being retained as the company’s advisors. If that firm of accountants decides to cease trading or stop acting for the company for any reason – the person would have to get permission of the court to alter the original condition to allow another firm of accountants to be appointed in its place.  The key is to anticipate any possible problems and seek the court’s permission for a change to the original order BEFORE the breach takes place.

What happens if the person who obtains permission then breaches a condition of his / her director disqualification order?

If a condition in the director disqualification order imposed by the court is breached, the following happens:

a. The permission ceases to exist.

b. The person concerned would then be in possible breach of the original director disqualification order and subject to the criminal consequences as set out already in the blog – either a fine or imprisonment.

Will the court impose any conditions on a person when granting permission pursuant to Section 17 of the Company Director Disqualification Act 1986?

The answer is yes. It will apply conditions it believes are needed to protect the public from what happened before, happening again. 

Does it matter if the individual subject to the director disqualification order has been involved in a number of other insolvent companies?

It can have a bearing as the court is allowed to consider the number of insolvent companies a person has been involved in when deciding to grant permission.  In order to overcome this, it is sensible to offer an explanation as to the other insolvencies to the court.

What does the court consider when granting permission applications?

The court’s powers are wide and unfettered due “to the infinite variety of circumstances which may apply to future cases not before the court”.  Each case depends entirely on its own facts. They will take in to account the following:- 

a. That the regime is designed to protect the public and not be penal. The idea is to protect the public from a recurrence of the conduct which lead to the disqualification order being made in the first place.

b. There is no presumption in favour of permission being granted.  The onus is on the Applicant to persuade the court, on the balance of probabilities, to grant the order.

c. That the grant of permission is a privilege, not a right.

d. That permission will only ever be granted for specific companies, not on a general basis.

e. That each case will be looked at on its own merits.

What happens when an individual’s section 17 leave application is refused?

There is the ability to appeal an adverse order in certain circumstances.

What can a person do if he / she can’t get their application pursuant to section 17 of the Company Director Disqualification Act 1986 heard within 21 days?

a. The person resigns his/her position and waits until they can obtain a court date to hear the application.

b. The person could alternatively apply for an extension to the 21 day period whilst he/she gets the application in order.

c. The individual could apply for a “stay” of the disqualification order pending the application for leave being dealt with (although there is limited jurisdiction by the court to do this).

d. The person could invite the court to order that interim permission to act should be granted pending the hearing of the substantive application for permission – to preserve the status quo.

e. The person could ask the court to grant permission for a specific purpose for a specific period of time.

How long after being disqualified must a person make an application for permission to remain a director of an existing company?

Basically, once a disqualification order is made (or a person gives an undertaking to be disqualified), he/she has 21 days to resign any current directorships and/or cease being involved in the management of a company. If the person makes an application within 21 days and is granted permission, he/she doesn’t have to resign their directorships or cease to be involved in the management of a company.

Tuesday, 14 January 2014

What can a person do if he/she is not sure if their current job means they are acting in contravention of a director disqualification order?

The Civil Procedure Rules (the court rules governing litigation) allow a person to apply to court for “declaratory relief” (i.e. a ruling from the court) that the activities a person proposes to undertake are not prohibited under the terms of the order.

If this is done, the Court considers the question of “justice” to both the Claimant and Defendant, whether the declaration would serve a useful purpose and whether there are any other special reasons why the declaration should not be made.

The application needs to be served on the Secretary of State (as custodian of the public interest) and it would either comment on or oppose the application. 

In reality, if someone is considering an application for declaratory relief, it is best done in tandem with a formal application for permission to remain / become a director pursuant to section 17 of the Company Director Disqualification Act 1986. 

An application for declaratory relief might for example, be relevant for a disqualified person wanting to be a consultant.

Does there need to be a separate application for permission pursuant to Section 17 or can it be done as part of the trial in the main director disqualification proceedings?

It can be dealt with as part of the trial, but it is not recommended as the individual will have to demonstrate why it is not practicable to issue a separate application. 

What happens if another person acts on behalf of a disqualified director?

That person can be disqualified as acting as a director can face a fine or imprisonment. It is not a way around a director disqualification order.

What constitutes acting in breach of a director disqualification order?

a. Acting as director.

b. Acting as receiver of property.

c. In any way whether directly or indirectly becomes concerned or takes part in the promotion, formation or management of a company.

What happens if a person simply carries on as before without permission?

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

(i) It can lead to imprisonment for up to 2 years and / or a fine [section 13 of the Company Director Disqualification Act 1986].

(ii) That person 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].

The Secretary of State does check up on banned directors. They can contact staff, suppliers and other people to determine whether a struck off director is still essentially running a business.

Will a person seeking permission to remain a director have to give oral evidence at court as part of the application?

Whilst technically a person might have to give oral evidence, it is highly unlikely. Applications are ordinarily dealt with on the basis of the written Affidavit evidence only. 

The Secretary of State has the power to give evidence himself on any relevant points or call witnesses as part of its job to protect the public interest. However, this rarely happens. Any issues are often ironed out in correspondence beforehand.

Can the application for permission to remain a director be heard in a different court?

A person can always apply to have it heard elsewhere (often it is better to have a case heard by a Judge experienced in company matters), but there is no guarantee it will be transferred.

Where will an application for permission to act as a director be heard?

Ordinarily this will take place in the court which had jurisdiction to wind up the company, the person’s conduct in which, lead to the original disqualification. 

Is a person ever allowed to be a director whilst disqualified?

Section 17 of the Company Director Disqualification Act 1986 allows a person in certain circumstances to remain as a director (or be involved in the management of a company) despite being subject to a Director Disqualification order.

In order to gain the benefit of the court’s permission pursuant to Section 17 of the Company Director Disqualification Act 1986, that person will need to make a formal application to court supported by sworn written evidence.  

Tuesday, 7 January 2014

How long will the court reduce the period for if the application is successful?

Each case is based on its own individual merits. As such, it is impossible to know firstly whether it will be successful and secondly, how long the Judge might reduce the period of disqualification for. 

For some people nearing the end of the disqualification period, it might simply be best to “wait it out” rather than make an application. 

Another word of warning is that even if a court does reduce the period of disqualification, it might only do so for a short period – eg 6 months or a year.  Whilst this is better than serving the entire period of the original disqualification, a person always needs to assess the cost / benefit of such a reduction. 

Does the court have to reduce the period once it has heard the application to reduce the period of disqualification?

The answer is No, they don't have to reduce a disqualification period.

It might refuse to do so, on the basis of the evidence presented. However, your legal advisor should not advise a person to proceed to a hearing of the case if the grounds fall short of that required to justify an order under this section. 

Is it a complicated procedure to reduce a period of disqualification?

The application is relatively straightforward.  

The main part is drafting affidavit evidence (ie written statements).  These need to cover both the reasons for the original disqualifications in detail and then set out the grounds why the original period of disqualification should be reduced.

That evidence is served on the Secretary of State and it is likely it will then be referred to one of his panel solicitors to deal with.  They may respond with their own written evidence or simply attend the hearing before the Judge to make comment. 

The length of the hearing will depend on the volume of evidence the Judge has to consider. Normally however, you could expect the hearing to last no more than half to one day. You would need a barrister to attend the hearing to present the case to the Judge and deal with the legal argument. 

What happens if the person couldn’t afford proper legal advice at the time he/she gave the original disqualification undertaking?

In the Jonkler case mentioned in our previous blog, the Judge made it clear that this is something they will rarely take in to account – mainly due to the number of cases which would fall in to this category.