Pre-action legal costs

Where a Director of a company placed into insolvency proceedings faces enquiries by the Insolvency Service, it is advisable to seek the assistance of solicitors with the requisite expertise in the area of Director Disqualification and potential claims under the Insolvency Act 1986 and associated legislation.

It is quite common for Directors to seek to negotiate such matters themselves, perhaps on the basis of providing such assistance (as per their statutory duties).

However, in reality, with their knowledge of Director Disqualification proceedings the Insolvency Service will use any such response in evidence against that Director (should proceedings be subsequently issued), with letters, telephone notes of conversations and narrative statements provided to the Official Receiver often comprising a vital component of the documents exhibited to Director Disqualification proceedings.

With this in mind, it is recommended that a Director does not enter into such negotiations without first at least seeking advice and, preferably, instructing solicitors to correspond with the Insolvency Service (or their instructed solicitors).

Your solicitor’s legal costs

Solicitors representing a Director will expect the Director to pay their legal costs, although this will depend upon the arrangement that Director has with his solicitor or any alternate funding arrangement.

Where a solicitor is employed to advise and assist the Director at an early stage of negotiations with the Insolvency Service, and well before any proceedings are issued, then (as suggested above) these legal costs may become a necessary evil to best avoid the prospect of being disqualified as a Director.

In our experience, we find that less legal costs are incurred where a Director employs a solicitor early on and well before the issue of any threatened Director Disqualification Claim.

Costs and recovery where Proceedings are not issued.

Where a solicitor is employed to provide advice or assist with negotiations with the Insolvency Service, including providing representations (which often involves the collection of financial and factual information), then the Director will incur legal costs.

If the efforts of the Director and his solicitor lead to a clearer understanding of events by the Insolvency Service (or even their instructed solicitors) and the Insolvency Service decide that disqualification proceedings are not going to be issued, then this brings matters to a close and (for this company at least) the Director is not at risk of being disqualified.

But what of the legal costs s/he has expended?  How are these recovered?  The simple answer is that they are a cost of avoiding being disqualified – unless the Director has the appropriate insurance in place to pay such costs, then such legal costs (which will be considerably below what could be expended in a litigated Disqualification Claim) must be borne by the Director.

Costs and Recovery when Proceeds are issued

Where a Director employs a solicitor to advise or assist with representations made to the Insolvency Service, then in the event such efforts fail and proceedings are threatened or issued, the ability to recover such costs will depend on a number of circumstances.

Firstly, if the Director does not decide to defend the Disqualification Claim and instead offers a Disqualification Undertaking then the costs are lost in a similar manner to the above – no proceedings are issued and the legal costs must be borne by the Director.

Secondly, where proceedings are issued and the Director is successful at defending the claim then s/he may claim their all of their legal costs incurred through to the discontinuance of the Disqualification Claim or the dismissal of the Disqualification Claim at trial.

The legal costs claimable will include pre-issue legal costs.

Thirdly, where a Director seeks to defend the Disqualification Claim but fails in their defence, then legal costs (as with all litigation claims) are payable to the successful party, which in that scenario will be the Secretary of State.  Accordingly, the Director’s legal costs pre- and post-issue will not be recoverable and they will be liable for the Secretary of State’s legal costs.

At Francis Wilks & Jones we have considerable experience of Director Disqualification proceedings and commonly assist Directors early where, from experience, the legal costs incurred are far less where the Secretary of State can be persuaded not to continue their proposed claim.

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.