Undertaking Offer and Risks
The Insolvency Service are an executive agency acting for the Secretary of State for Business Industrial Strategy and Energy (“the Secretary of State”) in respect of all insolvency matters, from the initial administration and processing of companies and individuals placed into an insolvency process (liquidation/administration/bankruptcy) through to investigations into matters of public interest and bring civil or criminal proceedings against the alleged wrongdoers.
Part of this role includes the investigations and then seeking the disqualification of directors of limited companies that have been placed into insolvency.
A director of a company targeted for disqualification may be able to volunteer to be disqualified by providing a Disqualification Undertaking. This will avoid the inconvenience and delay caused by legal proceedings, as well as (for both parties) the avoidance of the substantial legal costs.
If a director does not offer a Disqualification Undertaking then the only remaining option for the Insolvency Service is either not to pursue their Disqualification (potentially on the basis of representations received) or to issue legal proceedings.
Notice of Legal Proceedings
The Company Directors Disqualification Act 1986 requires that at least 10 days’ notice is provided to any director against whom a Disqualification Claim is proposed to be issued.
This notice is commonly referred to as the “Section 16 Letter”. See our more general description of this document here.
Offers contained within Section 16 Letter
The Section 16 Letter will summarise the case against the director, more particularly explaining the key allegations of misconduct. There is of course an opportunity to respond to this letter with your own representations, although we would suggest this is better done after legal advice is sought.
Most importantly, however, is that the Section 16 Letter will offer the opportunity to agree a Disqualification Undertaking for a specific period, which will be discounted from the disqualification period they will seek in legal proceedings.
The discount has historically been 6 months for Disqualification periods (which would be sought at Court) under 5 years and 1 year for higher disqualification periods.
On this basis, there is a great incentive for a director to accept this offer of a Disqualification Undertaking, which is for a lower period and additionally eliminates the legal costs that would be incurred and s/he may have to pay in litigated Disqualification proceedings.
As with any commercial claim, by compromising it early you will never be able to establish whether your stated defence would have been successful. In fact it is the very threat of a Disqualification Claim, with the Secretary of State having endless funds to enable the proceedings to continue through to trial that often pressurises Directors to offer a Disqualification Undertaking to avoid such costs.
However, especially nowadays, this benefit of accepting a Disqualification Undertaking has been diluted considerably as a result of other financial penalties the Disqualification Undertaking may bring.
Firstly there is your future career and indeed, for those who are already directors of a new company(s), the risk to their employees and suppliers who may face redundancy or a loss of business if you are disqualified.
Of course, you can seek an Order of Court granting you leave to be a director notwithstanding your Disqualification, but this will lead to increased legal costs of such an application (which you were trying to avoid by signing the Disqualification Undertaking!)
For more information on seeking leave please click here.
In addition to the above risks, as a result of the Small Business, Enterprise and Employment Act 2015 Directors signing a Disqualification Undertaking may now be immediately subject to the mandatory penalty, described as a Compensation Order.
A Compensation Order is an Order by the Court making a financial award for damages equivalent to the losses suffered as a result of the misconduct described in your Disqualification Undertaking.
As a result of this legislation being passed, the legal costs benefit (for a majority of directors) of voluntarily signing a Disqualification Undertaking is lost – as their signature on the Disqualification Undertaking may lead to their immediate liability for a Compensation Order.
As a Disqualification Undertaking is a statutory contract, you will not then be able to argue against its contents (which will include details of the misconduct that you admit) and so your defences will be severely limited.
For more information on Compensation Orders please click here.
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 upon receipt of a Section 16 Letter (or thereafter).
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.