Notifications in section 16 letters

If there was ever a star rating for law firms, Francis Wilks & Jones would score five stars plus. Professional and pro-active, they were able to understand my problem quickly, provide expert advice, outline a solution and put it into place with a successful outcome. I should have gone to them sooner

A client we successfully defended in director disqualification and insolvency related proceedings

Where a company has been placed into insolvency proceedings the Official Receiver or the appointed liquidator or administrator must investigate and/or report on the conduct of directors prior to the commencement of insolvency.

This can include

• previous directors;
• shadow directors;
• de facto directors;
• directors registered as appointed at Companies House (as at the date of insolvency).

There is an ongoing duty for liquidator or administrator to continue reporting on a director’s conduct (as they come across further information) and it is not uncommon for the Secretary of State, upon the outcome of investigations or following receipt of such reports, to send a director a letter of enquiry or questionnaire seeking responses to any concerns raised.

The Secretary of State is represented by the Insolvency Service and, if it is determined that there is sufficient evidence of misconduct, a decision may be made to carry out further comprehensive investigations with the ultimate outcome that steps should be taken to seek the director’s disqualification and, if necessary, that disqualification proceedings issued.

Notice of intention to issue disqualification proceedings

Directors may face ongoing correspondence with the Insolvency Service, often responding themselves or with the assistance of an accountant or a solicitor.

• it is a risk to respond to any such enquiries without a complete understanding of the risk of disqualification faced, as a director’s responses will often be used as evidence in support of a disqualification;
• directors should be aware that the disqualification proceedings are issued in the public interest. The director does not have to demonstrated criminal or fraudulent behaviour to be disqualified – mere negligence or insufficient experience can lead to a disqualification order.

However, once the Insolvency Service has completed its investigations (and have made a decision to issue proceedings), then they will provide a notice of the intention to issue disqualification proceedings pursuant to Section 16 of the Company Directors disqualification Act 1986 (“the Section 16 Letter”).

The section 16 letter is a mandatory requirement to provide 10 days’ notice of the intention to issue proceedings.

Commentary on the risk of a compensation order

A section 16 letter is sent with the intention of persuading a director to offer a disqualification undertaking which will minimise the Secretary of State’s legal costs and expedite the disqualification.

• as of writing, the section 16 letter will offer a reduced undertaking period and may include written confirmation that the Secretary of State has no intention to seek a compensation order;
• the reason for this is because the threat of a compensation order acts to negate the benefit of a disqualification undertaking which was always that it would enable the director to avoid costly legal proceedings.

Risks to directors

In the section 16 letter, the protection against the risk of a compensation order is most commonly addressed by the following paragraph (or something similar):

“Based on the current matters of unfitness being pursued in these proceedings, the Secretary of State does not consider that compensation proceedings are appropriate and does not intend to seek a compensation order. Only misconduct after 1st October 2015 would be taken into account in deciding if a compensation order was appropriate and loss must be attributable to the misconduct. Should new facts or further matters of misconduct (which might give rise to a valid compensation claim) be brought to the Secretary of State’s attention, he may revisit this decision but, if he did so after the case had been settled, further proceedings would be necessary and you would, at that point, have an opportunity to make representations or defend the matter.”

This raises two important concerns for a director:

• the statement only refers to the Secretary of State’s “intention”. There is no compulsion on the Secretary of State not to pursue such proceedings; and
• the statement further qualifies that the Secretary of State may choose to issue compensation order proceedings if “new facts or further matters of misconduct” come to light.

These risks will remain even after a director has signed a disqualification undertaking (as described in the above statement) for the entire period of limitation, which is 2 years from when the disqualification undertaking is accepted from the director.

Accordingly, reliance on such a statement does not discharge the risk that a director may face a compensation order claim.

At Francis Wilks & Jones we regularly advise and assist directors with regard to threatened disqualification proceedings and defending disqualification claims, offering a disqualification undertaking, seeking leave or permission to act as a director and facing the risk of a compensation order. Please call any member of our Director Services Team for your consultation or simply email us. We are here to help.

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