Director Disqualification Undertakings
Before Disqualification Undertakings were introduced in the year 2000, if you were facing Director Disqualification proceedings, the path to resolving the matter before court involvement was less straightforward. Back then, directors typically had to wait for the Insolvency Service to formally begin legal action against them. Once that had been done then you could, with the Insolvency Service or solicitors they had instructed, negotiate a settlement of the proceedings through what was known as the “Carecraft” procedure - the forerunner to the Disqualification Undertaking process.
What are Director Disqualification Undertakings
The introduction of the Disqualification Undertaking through the Insolvency Act 2000 aimed to offer a more direct way for directors who didn't wish to contest the process, in a more straight forward way. It was hoped this would help to make the often, considerable costs, associated with disqualification proceedings, more manageable.
The basis of the process was the newly introduced Section 1A of the Company Directors Disqualification Act 1986. The wording of the section allowed the Secretary of State, if appropriate, to agree to an undertaking from you, as a director, that you:
“will not be a director of a company, act as a receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has leave of a court.”
The newly introduced section also determined that the Disqualification Undertaking was to become effective 21 days after it was signed by the Director and the Secretary of State. The period runs from the date it is signed on behalf of the Secretary of State and not by the director.
Considering the benefits of accepting a Disqualification Undertaking
If you receive correspondence from the Insolvency Service confirming that they are considering initiating proceedings against you – then the process will remain the same to begin with. The director will still receive a Section 16 letter from the Insolvency Service detailing the allegations that, you, as the director could face. The change, following the introduction of the new section in the Insolvency Act, will be the making of an offer to you, as the director, of an opportunity to enter into a Disqualification Undertaking.
As with the Section 16 letters that were sent prior to the introduction of the new process, if you decide to not provide a Disqualification Undertaking to the Secretary of State then if the allegations are considered to have merit then proceedings will be issued at the court. It is important to note that whether you sign a Director Disqualification Undertaking, when you received the Section 16 letter, there will always be the chance to sign a Disqualification Undertaking - right up to the final hearing of the claim.
The largest benefit of signing a Disqualification Undertaking is that it ends the process there and then which means that there will be no further costs for either party. This will be a considerable financial saving for the director.
Important considerations before accepting a Disqualification Undertaking
It is strongly advised that a director seeks legal advice immediately after initial contact with the Insolvency Service to fully understand the circumstances and receive proper guidance. Failing to do so can lead to you signing a Director Disqualification Undertaking, which can lead to a number of serious consequences for the unadvised director.
If you decide to sign a Director Disqualification Undertaking, it will be publicly registered, potentially affecting your current business interests, even if you're only a shareholder. It's crucial to comply with the Director Disqualification Undertaking, as breaching it can result in severe penalties both civil and criminal, including imprisonment.
A Director Disqualification Undertaking does not prevent you from running a business, provided the company it does not benefit from limited liability, or from being an employee, but it does restrict your ability to be involved in the management of your business. However, the vague language in the Director Disqualification Undertaking, such as "acting directly or indirectly in the management of a company," makes it challenging, deliberately so in our opinion, to determine what constitutes a breach of the terms of the Director Disqualification Undertaking.
It is imperative that you give careful and detailed thought to the role you intend to play in the company in order that you do all that you can to avoid violating the undertaking. If you are not sure as to the possible consequences, then you should discuss this and the options you have to move forward from our team.
Additionally, the title of "director" is not the only factor; actions that indicate management involvement, such as decision-making, dealing with the bank, negotiating contracts, and interacting with staff, can result in a report to the Insolvency Service and the potential for an investigation into the suspected violation of the Undertaking. It is also possible that you could be identified as a “shadow director” and, as a result, be found in breach of the Undertaking as a "shadow director" even without the official title.
Taking legal advice is crucial to understanding your options and ensuring you don't breach the Director Disqualification Undertaking. If you should decide that you can justify a need to be more involved than you can be after you have signed a Director Disqualification Undertaking then you may want to consider seeking advice as to whether you can make an application under Section 17 of the Company Directors Disqualification Act. This, if achieved, would then allow you to act as a director of a specific named company, subject to certain conditions, during your disqualification.
Compensation Orders
In perhaps the most significant recent change to the Director Disqualification regime, we saw the introduction of Compensation Orders.
Under this new provision, if a director signs a Disqualification Undertaking, which is accepted by the Secretary of State, they immediately become liable to compensate the company’s creditors (through the Insolvency Service/Secretary of State) for any losses caused by their actions, as agreed, detailed and set out in the Director Disqualification Undertaking.
However, the use of the Compensation Order is completely at the Insolvency Service’s discretion; it is entirely possible that they may choose not to pursue a Compensation Order through the court. If, once that have considered all of the evidence in their investigations, they do consider it appropriate, then the Insolvency Service will notify the director in writing when sending the Section 16 letter.
How our Restructuring & Insolvency team can help you
If you are a director and have concerns about your duties or are facing an investigation, it is crucial to seek legal advice immediately. Please contact Richard Ludlow on 01732 496493 or by the enquiry form on this page.