Legal Proceedings: Considering Risk and Cost

Where you are threatened with a legal claim for your disqualification as a Director, issued at Court, for most defendants the priority is to try and persuade the Secretary of State or the Official Receiver (who will be issuing such proceedings) not to pursue a legal claim.

An opportunity is always provided by the Secretary of State’s representative, i.e. the Insolvency Service, for a Director to exchange correspondence and provide representations to convey their side of the story.

However if the Insolvency Service, despite the representations made by you (in person or through your solicitors), are determined to commence legal proceedings against you then this will be done by way of a claim form and supporting evidence containing all of the information they have collected in support of their allegations of misconduct.

These allegations, together with their findings, are what is put before the Court in support of a claim that a Director should be disqualified from acting as a Director or in the management of a limited company.

Options

As can be seen here, prior to issue of proceedings a Director will be provided with the opportunity to offer a voluntary Disqualification Undertaking under cover of what is referred to as a “Section 16 Letter”.

If an undertaking is not provided, then in the absence of written representations persuading the Secretary of State not to proceed, then the only remaining option is to defend the Disqualification Claim.

Risks of higher period of Disqualification

In the Section 16 Letter the Secretary of State will, in the interest of avoiding delays and mitigating costs, offer a slightly lower period of Disqualification than would be sought in the subsequent legal proceedings. 

Although technically an issued Disqualification Claim does not seek a specific period of Disqualification if successful then the Secretary of State will conventionally ask the Court to disqualify the Director(s) will a higher period of time than would be acceptable for a Disqualification Undertaking offered under a Section 16 Letter.

Accordingly, legal proceedings carry the risk of the Director being disqualified for a higher period, as the period of disqualification is entirely at the Court’s discretion and it may be even be higher, once the evidence has been fully explored and witnesses cross-examined at trial.

Conversely, the disqualification period could be shorter (or even much shorter) for the same reasons.

Director’s legal costs

When defending a Disqualification, in most instances a Director will have to employ a solicitor to manage the litigation proceedings and a barrister to attend Court hearings and the final determination of the Disqualification Claim at trial.

Occasionally we see Directors deal with their own defence, although from experience this is not recommended unless you are someone with legal experience sufficient to properly manage such proceedings.

If a solicitor is instructed, then they will need to be paid throughout the proceedings, which could last for between 1-2 years.  There may potentially be methods to protect such costs risks but in a majority of cases, the Director defending the Disqualification Claim will have to fund his defence and faces the risk that (if s/he is unsuccessful in their defence) of not being able to recover the funds spent.

Secretary of State’s legal costs

The above risks apply only to the Director’s solicitor’s legal costs and disbursements, which through proceedings will have to be paid.

In addition to this, if the Disqualification Claim is successful, the Director will (as well as having being disqualified as a Director of any company, including one s/he may be currently running) have to pay the Secretary of State’s legal costs.

These legal costs are incurred by a private firm of solicitors, usually a large national firm which will have substantial costs expended on the Disqualification Claim.  The costs to be paid are subject to assessment in many cases, although this is not always guaranteed and the Director who is liable to pay them may have a matter of weeks to come up with the necessary funds.

The Secretary of State may accept instalment payments, but it is nevertheless a considerable risk (as with all litigation) that if the Director fails to defend the Disqualification Claim then s/he will have to pay both sides costs of such proceedings.

Benefits

However it is certainly the case that it is not the case that you should not defend a Disqualification Claim.

Frequently disqualification claims are brought on weak grounds by civil servants without a full understanding of the legal process or their solicitors without a thorough understanding of the business itself or certain facts of the case.

Quite often Directors need the time that legal proceedings bring, to conclude current business interests or to provide an opportunity to gather further previously unavailable evidence.  Where such benefits outweigh the legal costs (see above) then a defence of the proceedings may be necessary.

Alternatively, defending a Disqualification Claim may be the only option as, if a Disqualification Undertaking is signed, then the Director may become immediately liable to pay a Compensation Order. [LINK TO 11] 

In such circumstances, the risk of a Compensation Order [LINK TO 11] may outweigh the risk of legal costs incurred in defending the Disqualification Claim (especially as such legal costs may also be recoverable, if the defence is successful). 

At Francis Wilks & Jones we have considerable experience of Director Disqualification matters and defending Directors in legal proceedings.  In a majority of cases where we have represented Directors at trial, the defence has been successful.  

Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.