Risk and Consequence of a Disqualification Undertaking
A Disqualification Undertaking should only normally be offered and entered into after taking legal advice – entering into a contract with the Secretary of State, and without legal advice, can lead to future consequences that you had not anticipated or considered.
As with a Disqualification Order made in litigated Disqualification Proceedings, a Disqualification Undertaking will be registered against a director’s name on a public register and there may be negative consequences for any current business interest, even if you are only a shareholder.
Additionally, you should ensure that you are compliant with a Disqualification Undertaking – as if such an undertaking is breached then the consequences are considerably more serious and could lead to a prison sentence.
Inability to manage current company
A Disqualification Undertaking does not prohibit a former director from running his/her own business (provided there is no limited liability aspect), from being an employee or working in a senior role within a company.
However, once disqualified, a director cannot act as director or in the management of a company. This latter term is difficult to define and indeed is a grey area as “acting in the management” of a company depends on the nature of your role, the size of the company and your function within that company.
The difference is subtle but often depends upon the decision-making role that individual has adopted and certain key aspects of their function – for example are they on the bank mandate, for small companies do they manage the funds received, are they negotiating with large suppliers or customers etc.
All of these may indicate that an individual is acting in a management position – a director is a director regardless of the title they adopt.
The same applies for Shadow Directors who instruct directors in the management of the company and are therefore, via the appointed directors, managing the company.
There is a simple solution to this dilemma – in a majority of circumstances, if the negotiation of the Disqualification Undertaking is effected correctly, the director can make an application for leave notwithstanding the disqualification pursuant to Section 17 of the Company Directors Disqualification Act 1986.
Please click here for more information on making such an application.
Disqualified Directors as Shareholders
Disqualification does not prohibit an individual from holding investment interests and shareholdings in a company – regardless whether it is a listed company investment or the majority shareholding for a family owned company.
However, when it comes to the latter scenario, it becomes very difficult to separate the lines where the ownership stops and management starts and indeed directors often breach such divides and may “accidentally” become involved in the company’s management (particularly as they often see the company as their own).
Where a director signs a Disqualification Undertaking, although it is not binding on the evidence in insolvency proceedings, it will almost certainly lead to a Liquidator claiming recovery of the losses arising from the Director’s misconduct.
These losses can include acting in breach of a director’s fiduciary duties (which often includes a duty owed to creditors), wrongful or fraudulent trading, preferring a creditor or disposing of assets for less than their market value, all of which will prejudice the company and its creditors in the insolvency proceedings.
At Francis Wilks & Jones we almost always see a disqualification claim closely followed by a claim by the Liquidator who, rather than seeking to protect the public interest, is seeking recovery of assets or compensation for the losses caused to the company by the director’s misconduct.
In a majority of circumstances where a Disqualification Undertaking is entered into, the director will then (or at the same time) be facing a claim by the Liquidator.
Where a Disqualification Undertaking is offered and accepted (and then entered into) then directors will be immediately liable to compensate the company for the losses caused to the company by his/her misconduct unless a Compensation Order is not sought.
A Disqualification Undertaking, as a statutory contract, cannot usually be contested once entered into and accordingly this strict liability to compensate the company may with time become automatic.
At Francis Wilks & Jones we have considerable experience of Director Disqualification Proceedings and dealing with litigated Director Disqualification Proceedings (including the above issues) through to trial.
Please call any member of our Director Services Team for your consultation now on 0207 841 0390. Alternatively email us with your query at firstname.lastname@example.org and we will call you back at a time convenient for you.