Defending disqualification

Once a company has been placed into insolvency proceedings, a Director may be required to either completed a long complicated document setting out the company’s affairs (including assets, liabilities, employees and other business matters) and/or they may be required to attend upon the Official Receiver or the appointed Liquidator or Administrator.

Complying with any such reasonable requirements is compulsory.  If a Director refuses to cooperate s/he may be subject to a Court application or, in respect of Disqualification Proceedings, the lack of cooperation will be held against them.

However, once a meeting has been convened and correspondence exchanged with the Insolvency Service, a decision will be rapidly made as to whether Court proceedings should be issued to seek a Director’s Disqualification.

The first notice of such a decision having been made will be upon receipt of a notice of an intention to commence Disqualification proceedings – commonly referred to as a Section 16 Letter.

Options for a Current Active Director

The options available to all Directors upon receipt of the Section 16 Letter are discussed here.

Ultimately the Director has to decide whether to defend the proposed Disqualification Claim or offer a Disqualification Undertaking.

Where the Director subject to such proceedings has a current company (or companies) and must continue to act as a Director, the only reason to offer a Disqualification Undertaking would be as part of a strategy to seek the Court’s permission that the Director may continue acting in his role (in respect of the current, or new, company).

Benefits of Defending a Disqualification Claim

We discuss the process of defending a Disqualification Claim here.

For some industries, especially the financial sector, those companies with government contracts and regulated businesses, the appearance of a Director on a register of Disqualified Directors is potentially destructive for their new company and its business.

If the Director has a strong defence, in any other proceedings they would have an entitlement to defend the claim and conventional commercial considerations (such as the legal costs being incurred) would normally act to weed out the weak claims.

However, as the Secretary of State does not act as a person (with the personal risks of a costs order being made against them) then the individuals or departments making the decision to issue and progress Disqualification Proceedings are unaffected by any commercial risk, which serves to make them less sensitive to any weaknesses in a Disqualification Claim.

In such circumstances, the benefit of defending a Disqualification Claim in proceedings is that ultimately justice should be done at trial, where a more neutral analysis of the claim will be made.

At Francis Wilks & Jones we find that almost all of the defended Disqualification Claims progressed to trial have been successfully defended. 

Benefits of Seeking Leave to Act

The benefits of seeking leave to Act are discussed in more detail here.

If a Director is content to seek Leave to Act then the disqualification proceedings are irrelevant and s/he can accept a Disqualification Undertaking with little concern on the basis that they are going to immediately dispose of the problem with the Leave Application.

However, it is important to understand that the Director will remain disqualified (and listed on the public Director Disqualification Register) and seeking Leave to Act as a Director will only provide comfort for the current company(s) subject to this application.

If further group companies are incorporated or that Director wishes to be a Director of these or any other companies, then another application will be necessary.

Which Option is best?

When comparing the benefits of defending a Disqualification Claim to the Disqualification undertaking/leave route then the most important consideration is whether the Director prefers to make this decision on a commercial basis or whether it is more important to demonstrate good conduct.

For regulated individuals, it is usually the case that if they wish to continue acting as a Director then they should defend the Disqualification Claim.  Seeking Leave to Act will not prevent them from potentially being struck off – whether they are FCA regulated, an accountant, a solicitor or any other regulated profession.

For Directors who are not regulated, and particularly those who are concerned as to legal costs, the alternate route is preferable as this will provide a less expensive, quick and more straightforward solution.

However, be warned as the acceptance of a Disqualification Undertaking, even where the Court grants permission to continue acting as a Director of the new company, may lead to other risks.

We address these risks here and we strongly recommend seeking legal advice before any such decision is made.  It is without doubt that the least cost option often results in increased exposure to damages claims by the Secretary of State or the Liquidator.

At Francis Wilks & Jones we regularly deal with Director Disqualification proceedings and applications for Leave to Act and can advise on your best option when considering your individual circumstances.

Please call any member of our Director Services Team 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.