Where a company has been placed into Insolvency, the Official Receiver may investigate a Director’s conduct in the management and direction of the company during the period leading up to insolvency.
An appointed Liquidator (if it is not the Official Receiver) is also legally required to file a report on all Directors’ conduct following his/her appointment as liquidator.
Following this investigations may be undertaken by the Insolvency Service, acting on behalf of the Secretary of State, with the purpose of gathering evidence and reaching a decision to issue a claim under the Company Directors Disqualification Act 1986 for the director(s) to be disqualified for a specific period of time between 2-15 years.
Once a decision is made to issue proceedings, the Secretary of State (acting via the Insolvency Service) is legally required to provide notice to the director(s) of the intention to issue proceedings.
Understanding the legal position
The Company Directors Disqualification Act 1986 exists to prevent Directors found guilty of misconduct from repeating such behaviour, thus protecting all stakeholders including the general public from the negative consequences of a director’s misconduct.
Misconduct, whilst often fraudulent, does not have to comprise any criminal element. A director who is reckless, negligent or even not very good at performing the role may be disqualified from acting as a director.
The most important aspect of Director Disqualification proceedings is protection of the public, regardless of the director’s motives or intentions.
Directors and their Fiduciary Duties
Directors have fiduciary duties, which were codified under sections 171-177 of the Companies Act 2006. These include duties to act in the company’s interests, not to allow personal interests to conflict with such duties to the company, to act with the requisite degree of skills and experience and to exercise independent judgment (particularly when receiving advice).
Where a company is insolvent or likely to become insolvent, these duties extend to the interests of creditors. For more information on a director’s Fiduciary duties please click here.
What is most important for directors to understand, is that his/her fiduciary duties, and the interests of parties to whom those duties are owed, are very different to the public interest duties, the risk to which may lead to Disqualification proceedings being issued.
Risks you face
We often see directors who have not sought the correct specialist legal advice or, even worse, have attempted to deal with the investigation stage and subsequent threat of proceedings (and even the proceedings once issued) themselves.
As a director (unless s/he has experience in this area) does not understand the latest case law and legislation, s/he will be instantly in a weak position and the Official Receiver, or the Secretary of State’s solicitors, will be keen to exploit such weaknesses.
It is a fact that any document, be that a letter, questionnaire or any other representation, will be held on file and used in the subsequent proceedings. As a result, early well-meaning decisions to either cooperate or make representations in your defence may severely prejudice you.
As a director, you have a legal duty to cooperate with all enquiries of the Secretary of State (acting via the Insolvency Service) but this does not mean you have to provide explanations or statements which may subsequently prejudice you.
Upon receiving a Section 16 Letter, or any correspondence from the Insolvency Service, it is important to seek legal advice early to ensure that your responses to any such queries simultaneously assist the Official Receiver/Liquidator in his/her administration of the insolvent estate but also best protect you from future disqualification proceedings.
Such advice may lead to representations being provided which account for any concerns raised and this may completely avoid, or at best mitigate, the risk of disqualification proceedings being issued against you.
In the alternative, early legal advice may best assist you in preparing for a contested Disqualification Claim issued at Court or manage your strategy and timing with regard to any Disqualification Undertaking you decide to sign or any future application you may choose to make seeking leave to be a director once disqualified.
At Francis Wilks & Jones we are able to provide such advice on strategy, timing, providing representations, defending a Disqualification Claim and seeking leave to be a director.
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.