It is vitally important to take advice before agreeing to a voluntary undertaking. Whilst directors think it is a quick way to bring an end to a difficult and stressful situation - it can have a sting in the tail. Directors are now liable for personal compensation orders once disqualified. And agreeing to a period which is too long can hugely affect your future career options. We have been helping directors with undertakings since 2002. Let us help you too.
Where a director is faced with the prospect of a director disqualification claim being issued against them, the Secretary of State will send a notice of such intended proceedings (the “Section 16 Letter”) setting out the alternative option of the director entering into a disqualification undertaking.
If a director does not offer such a disqualification undertaking within the time specified, proceedings will be issued at court.
However, the option to offer a disqualification undertaking will never disappear and there remains on an ongoing basis the option to offer a disqualification undertaking.
Reasons for a disqualification undertaking
The Secretary of State, under the Human Rights legislation, has a duty to act fairly in its conduct to all citizens of the UK.
Mirroring this, historically the requirement of a director to defend proceedings at court was previously considered onerous and, from 2000, the legislation was changed to enable directors to offer a disqualification undertaking on a voluntary basis.
The effect of a disqualification undertaking is identical to that of a disqualification order but has the added advantages that it is deal with quickly and avoids the necessity to incur legal costs (which the Secretary of State, acting on behalf of the taxpayer, would prefer not to have to pay).
The disqualification regime generally, and the disqualification undertaking, prohibits the individual entering into it from acting as a director or in any way in the management of a company in the UK.
If a director enters into a disqualification undertaking, yet then continues to act as a director regardless of the disqualification, then they may be liable for criminal prosecution.
In summary, the disqualification undertaking and potential criminal penalty arising from any breach has the effect to protect the public from a repetition of the same behaviour by the director entering into the undertaking.
Benefit of a disqualification undertaking
The simple benefit of a disqualification undertaking is almost identical for a director as it is for the Secretary of State. Immediately, the main benefit is to resolve the issue and prevent any further escalation of correspondence with the Insolvency Service.
This immediate benefit is twinned with the mitigation of legal costs – if you have not instructed a solicitor to act in such negotiations then by accepting a disqualification undertaking you will have not incurred any legal costs at all.
Additionally, as a disqualification undertaking effectively removes the need for the Secretary of State to issue legal proceedings, you will never have to account for or pay any of the legal costs that would normally be payable in litigated proceedings.
Matters to consider before offering a disqualification undertaking
The only exception to the cost-benefit of offering a disqualification undertaking is where you offer one after director disqualification proceedings have been issued.
There is a specific legal practice direction which provides that in such circumstances the director offering the undertaking will be liable for the Secretary of State’s entire legal costs (although you may be able to negotiate this).
There are also other risks which arise when you enter into a disqualification undertaking.
At Francis Wilks & Jones we have considerable experience of director disqualification proceedings and advising directors on the benefits and risks of entering into a disqualification undertaking either generally or as a component of a strategy to remain as a director of your current company.
Please call any member of our director services team for your consultation now for assistance. We can help, whatever your enquiry.