10 Common Mistakes in Director Disqualification Proceedings
1. Trying to deal with the director disqualification claim yourself
Often with the best of intentions, directors will respond to director disqualification enquiries from the Insolvency Service in the belief that their cooperation will help have the threat of the director disqualification claim dropped against them.
What directors do not realise is that once director disqualification enquiries are underway, the chances are that the Insolvency Service will carry on and issue formal director disqualification proceedings unless good clear reasons are given to persuade them to drop the director disqualification case. Often the initial director disqualification enquiries seem innocuous and easy to answer. However, this is a standard approach and directors are often lulled in to a false sense of security and provide answers to the director disqualification letters which are detrimental to their prospects of defending the director disqualification claim.
What is not often realised by directors is that any responses written by them without the benefit of an expert director disqualification solicitor can later be used against them as part of the director disqualification evidence in a claim for their disqualification. It is very easy to say things and provide documents which a director believes to be helpful but which in reality count against that director later on. Taking early advice avoids these potential problems and can make the difference to the director disqualification claim being dropped entirely without director disqualification proceedings being issued.
2. Avoiding communications entirely
Avoiding all communications in the hope that the director disqualification claim will “go away” is never a good idea. If the Insolvency Service has written to the director making director disqualification enquiries, the fact is that the director is now “on its radar”. If the director fails to answer any of the director disqualification letters, it is highly unlikely that they will simply drop the director disqualification claim. It is better to cooperate with the Insolvency Service and seek to persuade them by detailed correspondence not to continue with formal director disqualification investigations.
3. Feeling pressured to giving a quick response
Directors can often feel pressured to meet deadlines set out in director disqualification letters from the Insolvency Service. They should not. The Insolvency Service is quick to “impose” deadlines in the hope of obtaining a “hurried” response which can make their task easier, is administratively more convenient and assists with their annual director disqualification targets. Directors should not fall in to this trap. There is no legal requirement to respond by the deadlines set out in their director disqualification letters.
Remember that any responses given by a director can (and often are) exhibited to the formal director disqualification affidavit of the Secretary of State if director disqualification proceedings are issued. It is vital that any response is carefully considered and well thought out, even if the director decides not to take expert director disqualification legal advice.
A director is entitled to ask for sufficient time to respond. Don’t feel pressured in to responding in a hurry. Hastily put together responses can (and often are) used against directors and damage the prospects of defeating a director disqualification claim.
4. Responding without access to relevant company documentation
Often directors will respond to director disqualification enquiries without reviewing relevant company documentation, relying mainly on their recollections of events which can be many years old.
A director is entitled to request access to any relevant documentation which he/she believes will assist in responding to the director disqualification claim. That documentation will be retained by the liquidator of the company concerned. If a director needs to access it, he / she should ask for it. Indeed, a director is entitled to ask the liquidator for a complete inventory of all company documentation if he/she considers this will help identify documentation needed for the director disqualification response. If a director does this, he/she must make sure they inform the Insolvency Service what they are doing and that the timing of your director disqualification reply will depend on access to this information.
5. Failing to recognise that the insolvency service must adhere to certain time limits
What many directors do not realise is that the Insolvency Service has 2 years from the date of administration/liquidation of the company to commence formal legal proceedings. If the administration/liquidation took place after October 2015, that time period is 3 years.
If they do not bring administration/liquidation proceedings within those time periods, they are time barred from bringing a director disqualification claim without the leave of the director disqualification court. Often the Insolvency Service leaves matters late (i.e. shortly before the administration/liquidation deadline) before commencing director disqualification enquiries of the former directors.
However, always remember that the Insolvency Service is obliged to allow individuals sufficient time to respond properly to director disqualification enquiries and director disqualification letters. If they have left the matter close to the director disqualification deadline and are pressing for a response – this is their fault, not the person they are writing to. That person is entitled to seek sufficient time to respond to what are often comprehensive director disqualification allegations made.
A director must not feel pressured in to giving a quick response due to their slowness in making director disqualification enquiries. A director should not feel pressured in to giving director disqualification undertakings in return for them not issuing director disqualification proceedings just because they have left matters close to the deadline. This is especially true if the director believes he/she has a genuine defence to a director disqualification claim. Individuals faced with the threat of a director disqualification claim are entitled to have sufficient time to respond on such a serious issue.
6. Failure to ask for the draft evidence against you
If you have been served with a director disqualification “Section 16 Notice” letter indicating an intention to issue director disqualification proceedings in the absence of giving a director disqualification undertaking, an individual should not panic in to giving a director disqualification undertaking without first understanding the director disqualification allegations against them.
A person facing director disqualification proceedings is entitled to see a copy the draft director disqualification claim affidavit the Insolvency Service will have prepared setting out the basis of the director disqualification claims and evidence against that person. In order to issue director disqualification proceedings, the Insolvency Service has to swear a detailed director disqualification affidavit setting out the various heads of claim and the supporting evidence. By the time the director disqualification section 16 letter is sent, there should be a draft of that director disqualification affidavit evidence already prepared.
You are entitled to see the director disqualification draft affidavit, either to help your response or to enable you to take expert director disqualification legal advice. It is always sensible to do this. It will set out in far greater detail the allegations against you rather than the brief details often given in the director disqualification section 16 letter.
You can also ask for the supporting documents which go with the director disqualification draft affidavit evidence and we would recommend you do this as well.
Failure by the Insolvency Service to provide such information can be used against them if they then later issue director disqualification proceedings without having given you a proper opportunity to consider the evidence and respond accordingly.
7. Failure to negotiate a director disqualification undertaking
Directors often believe that they can only get rid of a director disqualification claim on an undertaking basis by accepting the period on offer as set out in the director disqualification Section 16 letter. This is not the case. Director disqualification undertakings can be negotiated downwards before they are accepted, normally following a detailed director disqualification letter back to the Insolvency Service setting out the grounds for director disqualification defence.
It is always in the directors’ interest to try and secure the lowest possible period of director disqualification undertaking. Apart from the obvious fact that the director disqualification period itself will be shorter, a reduced period can also assist in seeking leave to remain a director of a company despite being subject to a director disqualification order. It could have important implications on your future business career.
8. Running a company "behind the scenes"
Some directors believe that they can still run a company despite being subject to a director disqualification order – normally by appointing other directors in their place whilst controlling the company in the background. This is termed a “shadow director” and the Insolvency Service and other authorities are well aware of this practice.
These disqualified directors fail to realise that being in breach of a director disqualification order is a serious offence. It is a criminal offence. It can lead to a fine or imprisonment. It can also lead to that individual personally being responsible for the debts of the company going forward (or at least incurred during the period whilst s/he acted as a shadow director). It is often seen as a clear director disqualification breach.
The Secretary of State does check whether disqualified directors are acting in breach of the director disqualification order and he does receive reports from various sources who may be aware of a director disqualification (as it is publicly available information). Rather than risk the draconian sanctions, take advice on your options such as seeking leave to remain a director despite the director disqualification order.
Some disqualified directors believe that they can control the company despite disqualification due to the fact that they are the majority shareholder. This is not permissible. If a disqualified director tries to manage the business in the guise as a shareholder he/she will be acting in breach of the director disqualification order with all the serious consequences this can carry and will effectively be acting as a shadow director. Do not risk it.
9. Acting in the management of a company
Quite often, upon being disqualified as a director, an individual will take up another role within either an associated company or another company at a senior level on a salary as an employee with the view that s/he is not acting in breach of the director disqualification order / director disqualification undertaking. However, this is not the case and this area of management is a very grey area where such individuals have been found guilty of acting in the capacity of a director, despite not being registered (a “de facto director”). With this brings criminal and committal proceedings and the potential liability for the debts of the relevant company as described above.
This is not a risk worth taking and you should at least seek expert director disqualification legal advice before commencing any such senior role where there is potentially a misconception that you are acting in the same capacity as a director.
10. Believing you cannot be a director or involved in the management of a business if subject to a director disqualification order
You may have been subject to a director disqualification order or given a director disqualification undertaking sometime in the past and now have a need to act as a director of a limited company. Alternatively you may be contemplating offering a director disqualification undertaking (or be subject to disqualification proceedings) and seeking a way out whilst remaining as a director of your company. Alternatively you may have taken a new role up and want the Court’s endorsement that you are not acting in breach of the director disqualification order.
These problems can be dealt with by seeking permission from the director disqualification court to act as a director of one or more companies under Section 17 of the Company Directors Disqualification Act 1986, despite having been subject to a director disqualification order. This can be contemplated to time with the signing of a director disqualification undertaking (to ensure continuity) or can be applied for at any time prior to the end of your disqualification.
This is normally commonly available to directors who have been disqualified at the lower end of the disqualification bracket (up to 10 years) but in extenuating circumstances the Court may grant leave for directors who have been disqualified for higher periods.
Contact expert director disqualification solicitors now
Francis Wilks & Jones is the county’s leading firm of director disqualification solicitors. We are genuine experts in what we do with a combined experience of over 50 years in director disqualification claims. Contact one of our friendly expert director disqualification solicitors now for your consultation.
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