Applications to Remain a Director Despite Disqualification - Timings and Tactics
There are a wide range of important issues to consider before deciding whether an application for permission to remain a director (or be involved in the continued management) of your company should be made, and if so, when it should be made.
We can help guide you through what can be a tricky area of the law for those not familiar with it.
For the sake of consistency, throughout this booklet, an application pursuant to Section 17 of the Company Director Disqualification Act 1986 for permission to remain a director or be involved in the management of a company despite disqualification will be referred to as a “Section 17 Application”.
1. TIMINGS – General issues to consider.
It is important to understand that a Section 17 Application can only be made heard once a person has been disqualified as acting as a director. In the vast majority of cases, disqualification occurs in one of two ways:-
- By way of a Disqualification Undertaking to the court (Section 1A (1) of the Company Director Disqualification Act 1986) (a “Disqualification Undertaking”).
- By Order of the Court following trial (a “Disqualification Order”).
The most common way of being disqualified as a director is following the giving of a Disqualification Undertaking by the individual concerned (1 above). To understand more about Disqualification Undertakings, please download our tips booklet entitled “Disqualification Undertakings Explained”.
It is also important to understand that once a person has given a Disqualification Undertaking or is subject to a Disqualification Order, he/she usually has only 21 days in which to resign any directorships and cease to be involved in the promotion, formation or management of a company.
The remainder of this article will discuss the Section 17 Application on the basis it is being made following a director entering into a Disqualification Undertaking. However, a majority of the substance below, other than the timing aspect, equally applies to a Section 17 Application being made following the making of a Disqualification Order.
2. Why does timing matter when considering a Section 17 Application?
The answer lies in the fact that if you get your timings right, the Section 17 Application can be heard sometime during that 21 day window mentioned above – in which case (assuming your application is successful, either in its entirety or on an interim basis) you can effectively carry on as a director (or manager of a business) without having to step back from the business at all.
If you do not have your Section 17 Application heard within 21 days of signing the Disqualification Undertaking, you must cease taking any part in the management of your company (or being a director) until such time as your Section 17 Application is heard – which, subject to the court diary, could be weeks or months away. For a company where the involvement of the person threatened with disqualification at director level is critical to its future trading and success, a failure to “get your ducks in a row” and have the Section 17 application heard within that 21 day window can be disastrous.
Very careful advice is needed to try and maximise your chances of having the Section 17 Application heard within 21 days of disqualification becoming effective. This often requires assistance with the original negotiations (with the Insolvency Service) to ensure the timing (as regards when the Disqualification Undertaking is entered into) fits with the Section 17 Application.
We can help you achieve this and take the away the danger of a critical member of an organisation having to step back from its day to day running.
3. THE IMPORTANCE OF PROPER PLANNING
Proper (and early) planning is essential to the success of a Section 17 Application. Some of the reasons why are as follows:
- Section 17 Applications take time to get right. They need to be supported by detailed written witness statements back up by copies of relevant documents. If you leave your preparation to the last minute it is highly unlikely that you will be able to get your evidence finalised, your application issued and heard within the 21 day window. There is no point making a rushed application as the Court is far less likely to grant leave to be a director.
- You may need to appoint another director to your business (or possibly more). The court will usually not allow you to remain a sole director of your business when granting you leave. They will usually want a co-director appointed, more often than not with some form of financial experience and qualifications. Planning ahead can mean the proper person with the relevant experience is appointed. This could, for example, be someone from the firm of accountants retained by your company. Alternatively there are specialists we know who can supply finance directors if you are struggling to find one. Early planning will allow you the time to get this right and we can help guide you on this.
- To succeed in your Section 17 Application, you may need supporting witness statements from other individuals. Sometimes those people might be reluctant at first to provide written statements. By planning early, any doubts they have can be answered and the appropriate evidence in support of your Section 17 Application put together to maximise your prospects of success. We can also assist in identifying the right people to give that evidence at the earliest stage.
- The evidence in support of the Section 17 Application always has to deal with the financial position of the company which you require leave to be a director of (i.e. the new company). Without showing that the new company is financially sound the Court will not give you permission to act as a director as it will consider that the public interest is not protected. Practical matters such as demonstrating that returns and payments of all of the new company’s tax liabilities (i.e. corporation tax, PAYE, NIC and VAT), are up to date need to be thought about early on. There is nothing better to help demonstrate this in your evidence in support of the section 17 Application than having written confirmation from HMRC that all company returns have been submitted on time and are paid and up to date. However, obtaining a simple tax clearance letter from the Revenue can take weeks if not months. If you leave it too late, you will not get the document in sufficient time to include it in your evidence or provide it to the Secretary of State before the hearing – which can lead to increased work and difficulties in the Section 17 Application. Much of this work can be avoided with proper advanced planning.
- The Insolvency Service (who always act in these matters on behalf of the Secretary of State) will, no matter what standard your evidence is prepared to, quite often have numerous queries following receipt of the Section 17 Application and evidence. Their queries may be very detailed and require the assistance of the new company’s accountants and other directors. There is a necessity to satisfy these queries so no objection to the Section 17 Application exists upon the hearing of this application. These negotiations will often take some time, time which will need to be provided for between issuing the application and the hearing (which must be listed before the disqualification period commences).
- Poor planning will affect your chances of success at court. You need to be aware that both the Judge at court and the Barrister/Solicitor for the Secretary of State will look at the application very carefully. These types of applications are not granted lightly. If your application is rushed or doesn’t cover all the points it needs to, it is highly unlikely to be successful and you will have wasted your time and money making it.
IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.
ALTERNATIVELY, CONTACT THE DISQUALIFICATION TEAM ON 020 7841 0390
4. TACTICS - What period of disqualification are you facing?
5. Why is the period a director is disqualified for so important?
6. What can be done to improve a director’s position if the period of disqualification makes any application unlikely or less likely to succeed?
7. APPLYING FOR LEAVE: Practical Considerations
The overlap in timings and tactical considerations for directors seeking leave from proposed or ongoing disqualification claims is extremely complex and needs to be planned at an early stage.
If you require assistance in this area of the law, please contact us. We are experts with a proven track record. We can help you fulfil your business ambitions even in circumstances where a disqualification order has been made.