Applying to Reduce a Disqualification Undertaking Period
If you are a director of a company placed into insolvency proceedings, there is always a risk that the Secretary of State may target you for disqualification as a director and from acting in the promotion, formation and management of a limited company.
When faced with the threat of formal Court proceedings being issued as a Disqualification Claim, for most directors the best option is to agree voluntarily to be disqualified and thus avoid the distraction, inconvenience and (most of all) legal costs of such proceedings.
This is known as a Disqualification Undertaking.
What is a Disqualification Undertaking?
A Disqualification Undertaking is a statutory contract entered into between the director targeted for disqualification and the Secretary of State. Please click here for information on Disqualification Undertakings.
Upon signing a Disqualification Undertaking, the director contracts that – for a specified number of years dependent upon the severity of the alleged misconduct - that s/he :
“(a) will not be a director of a company, act as receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has the leave of a court, and
(b) will not act as an insolvency practitioner.”
By entering into this statutory contract, as with any other contract, a director is prevented from revoking his agreement to adhere to the above prohibitions, in exchange for which the Secretary of State will not exercise the statutory right to issue a Disqualification Claim.
A Disqualification Undertaking cannot normally be amended once entered into and will remain in force until the period it covers expires.
What if things change?
It is often the case that an individual who signs a Disqualification Undertaking later finds – either through opportunity, economic or family circumstances – that s/he needs to be a director or has attained a position where s/he is at risk of “acting in the management” of a limited company.
In such circumstances, it may be appropriate to apply for leave to act as a director, or in the management, of such a company and in certain circumstances the Court may grant such leave. We refer to our webpage here which provides information on applying for Leave to Act as a director despite being disqualified.
However, sometimes the period of Disqualification may be brought into doubt or it may subsequently appear that the Disqualification Undertaking was entered into on the basis of information or factors (which are relied on by the director when entering into the agreement) which may subsequently appear to be incorrect, misrepresented or untrue.
In such circumstances a director can apply for a reduction in the period of the Disqualification Undertaking.
Applying to Reduce a Disqualification Undertaking
Any director subject to a Disqualification Undertaking has a statutory right of action to apply to the Court to seek an amendment to either of the following aspects of the Disqualification Undertaking entered into:
- To reduce the period of the Disqualification Undertaking; or
- To obtain an Order that the Disqualification Undertaking shall immediately cease.
Where such an application is made, the Secretary of State (usually acting through the Insolvency Service) is required to draw to the Court’s attention any relevant matters.
The Court will not normally permit directors who have entered into a Disqualification Undertaking to later change their minds and seek to renege the terms of this statutory contract – the legal grounds for such an application requires a change of circumstance, information available or reliance on representations to effectively enable directors to exit or reduce the terms of this statutory contract.
Where such changes have occurred, then there may be very good grounds to bring such an application. However, a mere wish to reconsider events that existed at the time of the Disqualification Undertaking will be insufficient.
A “relevant” matter which the Secretary of State is refer to the Court could be anything that relates to the application – whether that be evidence of the former director’s knowledge of such circumstances or the public interest aspect of their application.
From experience, the Secretary of State will normally contest any attempt to exit from a Disqualification Undertaking via this route, for the obvious reason that such an application has the potential to undermine the public policy of disqualifying directors and means that the acceptance of a Disqualification Undertaking may not bring matters to an end (although this application may have further relevance to the risk of a Compensation Order being sought.
Why is this option available?
This option remains available and incorporated into legislation for the very reason that a Disqualification Undertaking is a contract negotiated between civil servants (acting on behalf of the Secretary of State) and the director (or his legal advisors).
A Disqualification Undertaking could in theory be negotiated and signed off without any professional input or advice and, as the Court are not required to be involved, there may be no objective input between the Insolvency Service (who are targeted with maximising the number of directors disqualified) and the director (who may not be legally qualified and may be in fear of a potential legal costs liability – a threat which is often misused).
This option gives the director (who is then disqualified) an option to exercise his/her human rights to appeal against any injustice arising from, for example, a misrepresentations provided to him/her as part of attempts to persuade them to enter into a Disqualification Undertaking.
At Francis Wilks & Jones we regularly advise and assist directors with regard to disqualification proceedings and applications to reduce or dismiss a Disqualification Undertaking.
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.