Directors Disqualification

Directors Disqualification

Defending directors facing potential disqualification is part of our core business.  Collectively, our team has decades of experience and includes a formal panel member of the Government’s Disqualification Unit.  Our understanding of the process and strategies adopted by the prosecution is thus both thorough and comprehensive.

The risks that company directors take have never been greater, with a concerted effort by Government and Insolvency Practitioners to take directors disqualification proceedings or bring financial claims against directors of failed companies.  We help directors to defend or manage such proceedings, either with the aim of avoiding disqualification altogether, or if this is not possible, to reduce the period of time for which a director is disqualified and obtain permission to act in companies that the director needs to be involved in.

If you have been contacted in relation to an investigation into your conduct as a director, or are facing the threat of disqualification proceedings, visit one of the links on this page. If you are facing a financial claim, visit our page entitled “Claims against Directors

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The Investigation Stage

Since 1986 the Government has had the power to disqualify individuals from being directors or managers of companies.  This power should only be used where it is in the public interest for the person to be disqualified.  The principle is that it is a privilege to be able to run a business with limited liability, and that privilege should be taken away from those who abuse it.

About 25,000 directors are affected by company administration or liquidation  each year, of which about 1,200 are disqualified. Over 80% of disqualifications are agreed to by the directors concerned by way of giving a disqualification undertaking. However, a much higher number than this are subject to investigation by the Insolvency Service (the Government department that deals with insolvency matters), including some cases where court proceedings are issued and then withdrawn.

Whenever a company goes into administration or liquidation, the administrator or liquidator has an obligation to submit a confidential online report to the Insolvency Service within three months with comments on the directors’ conduct. This can lead to a decision to take action to disqualify the directors.  We help directors through the investigation phase as this represents the best opportunity to dissuade the Government from taking such action.

What the statistics and our own experience shows is that it is vital for directors to take legal advice the moment they are contacted by the Insolvency Service to say an investigation is underway.  The best strategy is usually to engage with this process and work to persuade the Insolvency Service to abandon the investigation.

The Insolvency Service can ask what appear to be simple questions (e.g. “have you delivered up all the company’s records to the liquidator”) which are a trap for the unwary. If the Insolvency Service invites you to an early meeting (rather than just mentioning that you can have a meeting if you want one), then the alarm bells should be ringing!

The need for early legal advice will become more important once the Insolvency Service starts using its powers to ask the court to order the disqualified director to pay compensation to those injured by the director’s misconduct.  It is expected that this will start to happen in 2018.

Once the investigation is concluded and a decision taken by the Authorisations Team (the Insolvency Service equivalent of the Crown Prosecution Service) that a director should be disqualified, it becomes much harder and more expensive to persuade them to withdraw.  The statistics show that the Insolvency Service will only pursue cases which have a high probability of resulting in disqualification.

Disqualification Undertakings

The provision of disqualification undertakings requires the director to admit to certain agreed facts alongside an agreement to accept a fixed number of years’ disqualification. It is usually the most cost-effective means of addressing the allegations (if legitimately brought) or of bringing the complaints or proceedings to a conclusion.   

In our experience, more often than not, directors facing disqualification proceedings will decide to give disqualification undertakings either because there is a compelling case against them, or more usually, because they recognise there is a case to answer but do not want to incur the costs, risk, and stress of going to court with the Government as the opponent.  We can help the director negotiate the period of disqualification in a cost-effective and timely manner so that he or she can get on with their professional lives.

What is not yet known is how the new law on compensation orders will be implemented by the Insolvency Service and, critically, how this will impact on the decision to give a disqualification undertaking.

The period of disqualification proposed by the Government will range between 2 and 15 years depending upon the seriousness of the complaints.  Often these periods are categorised into brackets: a lower bracket of 2 to 5 years for less serious offences ; a middle bracket of 6 to 10 years; and a top bracket of 11 to 15 years for the most serious offences, often involving fraud.

Negotiation of disqualification undertakings is often done in conjunction with an application to court to obtain permission to act as a director of a specific company, which needs the director, despite the disqualification.

Compensation Orders

New rules introduced in October 2015 allow the Government to seek financial compensation from directors who admit wrongdoing in relation to their conduct.  It is likely these rules will be implemented  during 2018.

The provision of compensation can arise in two ways.  Either a director can agree to such provision , for example, to save the cost of contesting the same (this is called a compensation undertaking) or the Government can obtain an order for compensation (a compensation order) by application to the court.

An application to court has to be made within two years of disqualification being imposed and can only be sought for conduct occurring after 1 October 2015.

Whilst the rules relating to compensation orders are clear enough, it is unknown how they will work out in practice, for example, what attitude the court will take, in whose favour the compensation will be awarded, and how such rules will interact with a liquidator or administrator’s power to bring a financial claim against the director. 

The new rules are also likely to constrain a director from voluntarily agreeing to a disqualification undertaking  if to do so would expose them to the risk of a compensation order.

We at Isadore Goldman have a wealth of expertise in insolvency matters and are well placed to advise directors facing disqualification proceedings and in particular how best to reduce their exposure to a compensation order.

Permission to Act

Once a director is disqualified from acting as a director of a company, he or she will be prohibited for the duration of the disqualification from getting involved in the management of the company.  Management is a very broadly understood term and can be easily breached with serious ramifications including a custodial sentence. If disqualification cannot be avoided, and provided the allegations leading to disqualification are not so serious as to lead to a tariff in the top bracket (or the upper middle bracket), a director can apply to court for permission to continue to act as a director or manager of a specific company.

We have many years of experience representing directors in permission to act applications and can guide you through the requirements and likely conditions that the court might impose as a condition for granting permission.

Contesting proceedings

This is the most expensive option for a director but if funding permits or if we are requested to do so, we can defend contested disqualification proceedings.  This may be required if the director’s case against the allegations brought by the Government is particularly strong, if there is a risk of a high level compensation order being sought, if there is a strategy of delay, or if negotiations with the Government for a complete withdrawal or a significantly reduced tariff have broken down. 

If this is the preferred route forward, we will explain the required stages of the litigation and once we have the facts we can provide an estimate of the likely cost up to and including trial, or to an earlier stage that presents an optimum window for a negotiated settlement.

The information contained within this website is for information only and should not be construed as an accurate summary of the law or legal advice on any matter.

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