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.
Director disqualification undertakings came into force on 2 April 2001 as part of the Insolvency Act 2000.
Background to the undertaking regime
Prior to 2002, a person facing director disqualification proceedings 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 as a director voluntarily. The Company Director Disqualification Act 1986 simply did not cater for any form of voluntary director disqualification.
This made it both expensive and time consuming for people who were prepared to accept director 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 director disqualification undertaking was introduced in 2001.
Director disqualification undertakings – the present law
The present law is enshrined in Section 1A(1) of the Company Director Disqualification Act 1986.
Section 1A(1) of the of the Company Director Disqualification Act 1986 enables a person to give an undertaking meaning that that he/she:
- 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
- will not act as an insolvency practitioner.
Director disqualification undertakings are only available where director 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). Director disqualification undertakings are more commonly entered into in the first situation.
Periods of director disqualification
The maximum period which a person can be disqualified by way of director disqualification 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 of the Company Directors Disqualification Act 1986 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 director disqualification in one of those 3 categories.
If a person who is already subject to a director disqualification 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).
What conditions need to be satisfied before the secretary of state can accept a director disqualification undertaking?
There are 2 main conditions:-
- the Secretary of State must be satisfied that the person offering the director disqualification 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; and
- the Secretary of State must believe that it is in the “public interest” that he should accept a director 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 director disqualification 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 director 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).
How are director disqualification undertakings offered?
Normally, 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 director disqualification undertaking 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 director disqualification letter will
- summarise the nature of the director disqualification allegations against an individual; and
- offer a period of voluntary director disqualification (ranging between 2-15 years for Section 6 claims) which can be accepted by the individual in lieu of formal director disqualification proceedings.
A section 16 letter is normally accompanied by various information booklets on the effect of director disqualification and outlining the various procedures and options open to that individual if they wish to continue acting as a director despite the director disqualification undertaking. This procedure is most commonly referred to as seeking leave under Section 17 of the Company Director disqualification Act 1986 and details on this topic are covered in our separate web pages on our site on how to seek court permission to become or remain a director despite director disqualification.
At what stage can a director disqualification undertaking be given?
A director disqualification undertaking can be given either before or after the issue of formal legal director disqualification proceedings by the Secretary of State.
1. Prior to issuing of director disqualification proceedings
As set out above, before issuing formal director disqualification proceedings, the Secretary of State will send a section 16 director disqualification letter inviting the individual to give a voluntary director disqualification undertaking not to act as a director.
- it is open to that person to challenge the appropriateness of the threatened director disqualification by defending the formal legal director disqualification proceedings;
- however, if the person is unable or unwilling to fight a director disqualification claim (for example due to financial reasons), then he/she can sign a director disqualification undertaking which would mean that formal legal director disqualification proceedings are no longer necessary.
The question of costs is important as if a director disqualification undertaking is given by a person prior to the issue of legal director disqualification 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 director disqualification undertakings.
2. After the issue of director disqualification proceedings
A director disqualification undertaking can be given by a person after the issue of legal director disqualification proceedings as well. Indeed it can be given at any time up to and including trial of the director disqualification claim (or even during the trial, although not recommended).
However, it is important to understand that if a director disqualification undertaking is given after the issue of director disqualification 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 a director disqualification 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 should always be remembered that even where formal director disqualification proceedings have been issued, a person can remain a director of a business. It isn’t until a formal director disqualification court order is made, or a director 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.
Can the period of the director disqualification undertaking offered be reduced downwards?
It is always possible (and sensible) to try and negotiate the period offered by the Secretary of State downwards before accepting a director disqualification undertaking.
One way to try and negotiate the director disqualification 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.
When does a director disqualification undertaking take effect?
Ordinarily a director disqualification undertaking takes effect 21 days after the date it has been accepted by the Secretary of State.
Is a director disqualification undertaking a complicated document?
A director disqualification undertaking is a relatively simply document, no more than 2-3 pages long.
- the front page sets out the length of time a person you will be prohibited from being a director and the activities he/she is not allowed to carry out whilst the undertaking is in place;
- at the bottom of the front 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 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 director 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 director disqualification application for permission to remain a director will review the wording of the director disqualification undertaking. The less “prejudicial” it is, the better the chances of seeking permission.
What happens if the Secretary of State is unreasonable when negotiating the period of a director disqualification 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 director disqualification 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 director 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 director disqualification and we would refer you to other web pages on our site dealing with this.
Please contact one of our friendly expert director disqualification solicitors now for your consultation. At Francis Wilks & Jones, we have all director disqualification experience needed to deal with your matter. We are experts in disqualification undertakings and getting the best possible results for directors.