When can you offer a Disqualification Undertaking

A Director of a company placed into insolvent liquidation (either by Court Order Winding-Up the company or by way of a voluntary liquidation instigated by shareholders) or placed into administration (an alternate insolvency procedure) faces the risk of his conduct as a Director being investigated by the Secretary of State, acting via the Insolvency Service.

Where a Director has a company subject to a Winding-Up Order, s/he will first come into contact with the Secretary of State via the Official Receiver, who will contact all Directors of the company shortly after the Winding-Up Order and seek further information on the company’s affairs.

Otherwise, the Director’s first contact with the Insolvency Service may not be for some time after insolvency (and after the appointed Liquidator/Administrator has reported on the Director’s conduct) at which point the nature of their correspondence will be more focused on the Director’s conduct and decision-making during the period leading up to insolvency.

Threatened issue of proceedings

Following investigations the Insolvency Service will often write to Directors providing notice of the Secretary of State’s intention to issue a Disqualification Claim.  This is referred to as a Section 16 Letter and will be the first point at which the Insolvency Service will offer to accept a Disqualification Undertaking in exchange for not issuing such proceedings.

The Director needs to carefully consider his options at this point and seek legal advice before making any decision.

Either you or a solicitor may be able to make representations on your behalf, which may persuade the Secretary of State not to issue a Disqualification Claim.

If the offer of an undertaking is not accepted by the Director, and representations made are not effective, then proceedings will be issued against that Director.

Changes to the Period of Disqualification Undertaking sought

It may well be that, upon receipt of the Section 16 Letter the Director him/herself or his/her appointed solicitors make representations to the Insolvency Service on the allegations of misconduct.

These representations may persuade the Secretary of State that the misconduct is not as grave as first thought and as a result a reduced period of disqualification may become acceptable under a Disqualification Undertaking.

This can be a drastic reduction or a minor reduction, often with a view to agreeing a negotiation period of disqualification rather than issuing Court proceedings.

Post Issue of a Disqualification Claim

Once disqualification proceedings are issued, a Disqualification Undertaking can still be offered.  The offer could be made very early on after issue (at which point there may still be an opportunity to avoid any liability to pay the Secretary of State’s legal costs – especially if such an offer occurs before the Disqualification Claim is served on the Director/their solicitors.

Alternatively, the Director may choose to deal with his/her evidence and, upon receiving the Secretary of State’s evidence in reply, may be persuaded that the risk is too great or that the evidence does not enable a serious defence of the Disqualification Claim.

At this point, as with any other litigated claim, an offer of settlement by way of a Disqualification Undertaking may be made.

The cost of a trial is a significant part of the legal costs of disqualification proceedings and it is often the case that either the Director offers a Disqualification Undertaking pre-trial or the Secretary of State seeks to discontinue proceedings at this point, when it is apparent the Director will continue defending the Disqualification Claim.

A Disqualification Undertaking can be offered at any point including after commencement of the trial, although such discussions would normally arise between the parties’ instructed barristers.

Effect of Disqualification Undertaking on Trial

If a Disqualification Undertaking is offered just prior to trial, then it is not uncommon for there to be a remaining dispute as to the legal costs liability (which the Court may still be required to deal with).

If a Disqualification Undertaking is offered and accepted during a trial, then the parties will normally seek some time out to discuss issues such as costs and, provided agreement is reached, the trial will be immediately brought to an end and no Disqualification Order will be made.

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 free consultation now on 0207 841 0390. Alternatively email us with your query at info@franciswilksandjones.co.uk and we will call you back at a time convenient for you.