HomeFWJ TakeawayDirector disqualification claimsCommon reasons for disqualification10 common mistakes in director disqualification proceedings

Whatever stage of the disqualification process you are in, it is vital to avoid making mistakes which can end up having significant consequences later on - potentially damaging career prospects or leading to personal money claims against you. Our team has been dealing with disqualification claims since 2002. Let us help you.

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1. Trying to deal with the legal proceedings yourself

Often with the best of intentions, directors will respond to initial enquiries from the Insolvency Service in the belief that their cooperation will help have the threat of the legal claims dropped against them.

  • what directors do not realise is that once initial enquiries are underway, the chances are that the Insolvency Service will carry on and issue formal legal proceedings unless good clear reasons are given to persuade them to drop the case;
  • often, the initial Insolvency Service enquiries seem innocuous and easy to answer;
  • however, this is a standard approach and directors are often lulled in to a false sense of security and provide answers to the initial enquiries which are detrimental to their prospects of defending the claim.

What is not often realised by directors is that any responses written by them without the benefit of an expert solicitor can later be used against them as part of the evidence in a claim for their disqualification. It is very easy to say things and provide documents which a director believes to be helpful but which in reality count against that director later on.

Taking early advice avoids these potential problems and can make the difference to the claim being dropped entirely without formal legal proceedings being issued.

2. Avoiding communications entirely

Avoiding all communications in the hope that the the threat of legal proceedings “go away” is never a good idea.

If the Insolvency Service has written to the director with initial questions, the fact is that the director is now “on its radar”. If the director fails to answer any of the Insolvency Service letters 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 formal disqualification investigations.

3. Feeling pressured to giving a quick response

Directors can often feel pressured to meet deadlines set out in letters 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 director disqualification targets;
  • directors should not fall in to this trap;
  • there is no legal requirement to respond by the deadlines set out in their letters.

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

A director is entitled to ask for sufficient time to respond. Don’t 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 the disqualification claim.

4. 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 director is entitled to request access to any relevant documentation which he/she believes will assist in responding to the claims. That documentation will be retained by the liquidator of the company concerned.

  • if a director needs to access to company information, he / she should ask for it;
  • a director is entitled to ask the liquidator for a complete inventory of all company documentation if he/she considers this will help identify documentation needed for the response;
  • if a director does this, he/she must make sure they inform the Insolvency Service what they are doing and that the timing of your reply will depend on access to this information.

5. Failing to recognise that the Insolvency Service must adhere to certain time limits

What many directors do not realise is that the Insolvency Service 3 years from the date of administration / liquidation of the company to commence formal legal proceedings.

  • if they do not bring administration / liquidation proceedings within those time periods, they are time barred from bringing a claim without permission from the court;
  • often the Insolvency Service leaves matters late (i.e. shortly before the administration / liquidation 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 and letters. If they have left the matter close to the disqualification 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.

A director must not

  • feel pressured in to giving a quick response due to their slowness in making enquiries;
  • feel pressured in to giving voluntary undertakings in return for them not issuing proceedings just because they have left matters close to the deadline.

This is especially true if the director believes he/she has a genuine defence to a claim. Individuals faced with the threat of a director disqualification claim are entitled to have sufficient time to respond on such a serious issue.

6. Failure to ask for the draft evidence against you

If you have been served with a “section 16 notice” letter indicating an intention to issue proceedings in the absence of giving a voluntary undertaking, an individual should not panic in to giving an undertaking without first understanding the disqualification allegations against them.

  • a person facing legal proceedings 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 a claim, the Insolvency Service has to swear a detailed affidavit (a type of witness statement) 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.

You are entitled to see the draft affidavit, either to help your response or to enable you to take expert legal advice. It is always sensible to do this. It will set out in far greater detail the allegations against you rather than the brief details often given in the section 16 letter.

You can also ask for the supporting documents which go with the draft affidavit evidence and we would recommend you do this as well.

Failure by the Insolvency Service to provide such information can be used against them if they then later issue a legal claim without having given you a proper opportunity to consider the evidence and respond accordingly.

7. Failure to negotiate a voluntary undertaking to be disqualified

Directors often believe that they can only get rid of a claim on an undertaking basis by accepting the time period on offer as set out in the Section 16 letter. This is not the case.

  • undertakings can be negotiated downwards before they are accepted, normally following a detailed response 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 period itself will be shorter, a reduced period can also assist in seeking leave to remain a director of a company despite being subject to a disqualification ban . It could have important implications on your future business career.

8. Running a company “behind the scenes”

Some directors believe that they can still run a company despite being subject to a director ban – 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 banned 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 personally 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). It is often seen as a clear breach of the terms of the court order.

The Secretary of State does check whether banned directors are acting in breach of the court order and he does receive reports from various sources who may be aware of a director ban (as it is publicly available information). Rather than risk the draconian sanctions, take advice on your options such as seeking permission from the court to remain being a director despite the director ban being imposed by the court .

Some banned directors believe that they can control the company despite the ban due to the fact that they are the majority shareholder. This is not permissible. If a banned director tries to manage the business in the guise as a shareholder he/she will be acting in breach of the court order / undertaking with all the serious consequences this can carry and will effectively be acting as a shadow director. Do not risk it.

9. Acting in the management of a company – avoid the danger

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. The idea is that they will not be acting in breach of the court order or undertaking.

However, this is not always 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 you should at least seek legal advice before commencing any such senior role where there is potentially a misconception that you are acting in the same capacity as a director.

10. Don’t believe that you can never be a director or involved in the management of a business if subject to a director ban

If you have been disqualified (or are under the threat of imminent disqualification), there are steps a person can take to remain a director despite formal disqualification. This can be an incredibly important option if your continued livelihood and professional career depends on being a director or involved int he management of a company.

This is normally commonly available to directors who have been disqualified at the lower end of the disqualification bracket (up to 10 years) but in extenuating circumstances the court may grant leave for directors who have been disqualified for higher periods.

Whatever your enquiry, contact expert solicitors now. Francis Wilks & Jones is the county’s leading firm of disqualification lawyers. We are genuine experts in what we do with a combined experience of over 50 years in these types of claim. Contact one of our friendly solicitors now for your consultation.

I was greatly impressed with the commercial, tactical and technical ability of the team at FWJ. They quickly got to grips with a complex set of facts and, through their hard work, had the proceedings against me dropped and a significant proportion of my legal fees repaid. I couldn’t recommend them highly enough

A director we defended against a disqualification claim and other claims brought by a liquidator

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