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Frequently Asked Questions for Director Disqualification Problems
NDP helps solve Director Disqualification problems. The Director Disqualification team at NDP is headed by Neil Davies, an advisory editor to the leading text on the subject, Mithani on Director Disqualification and is made up of Solicitors who have worked for the Insolvency Service and who have acted for and against the Insolvency Service.
Our Director Disqualification Specialists convince the Secretary of State to stop the disqualification action against our client, relieving the stress & worry he was under.
In January 2016 we reported on a regulatory compliance dispute, where we advised and supported a client who was facing a criminal investigation by the Secretary of State for Business. Our client was highly stressed and believed he was heading at best for a large fine and at worst for a jail term. We are delighted to report that the criminal investigation has now been concluded with no charges being brought against our client. This article revisits the case and how we were able to help.
We know what the Insolvency Service wants. We know what the solutions to director disqualification problems are and how to achieve them. The key issue for the director, in order to maximise the available options is to act early. Click here to find out more about our work in solving Director Disqualification Problems.
Director Disqualification Proceedings (DDPs) are most commonly commenced under the provisions of the Company Directors Disqualification Act 1986 (CDDA).
They are brought only against “Directors”. However it is not only the Directors registered at Companies House, who are targeted. A person may be a “Director” in law, and thus subject to proceedings, even if not registered at Companies House. Such persons may be targeted as “De Facto” Directors or as “Shadow” Directors.
CDDA proceedings usually have to be commenced against the Director within three years of the date of the formal insolvency of the company to which they relate, and Director Disqualification lasts between 2 and 15 years, depending on the severity of the admitted/proved unfit conduct.
Such proceedings usually have to demonstrate that the Director has been involved in or allowed others to be involved in “Unfit Conduct”, usually arising out of a failed company. The question of what constitutes “Unfit Conduct” has to be determined on the facts of each case.
The director’s response will depend on the facts of each case and on what the Director wants to achieve, which might be to defeat the claim against the Director or to negotiate a lower period of disqualification than is offered by the Opponent (most usually, the Secretary of State) or to enter into a Director Disqualification Undertaking in agreed terms to end the proceedings.
Director Disqualification is a large and complex legal area. In this section you will find some of the most frequently asked questions we get asked about General Director Disqualification questions, Director Disqualification Proceedings and Director Disqualification Undertakings. Click on each section below for the questions and answers.
If you are currently experiencing a Director Disqualification problem, contact us now for a FREE initial discussion on the ‘phone or over a coffee. Don’t wait until it is too late. The sooner you get in touch with us, the more we can do to help.
Director Disqualification Proceedings Questions
Often yes. Once enquiries are started, the Insolvency Service will carry on the claim unless persuaded not to do so. We can help.Should you respond to enquiries? Often yes.If you fail to answer any of the Insolvency Service's letters, it is highly unlikely that they will simply drop the claim. It is better to cooperate with the Insolvency Service and seek to persuade them by detailed correspondence not to continue with a formal claim. Once again, we can help.
The court will look at a director’s conduct as a whole before deciding whether his/her conduct has fallen below the standards acceptable for a person to be a director of a company. However, any extenuating circumstances must relate to any allegations of misconduct.Examples of extenuating circumstances in cases include the following:
- Proper and reasonable reliance by a director on a professional person;
- One off misconduct which occurred during a time of extreme distress whilst a person’s wife or child was suffering from a lingering and terminal illness;
- Where the breach of duty relied upon only caused loss to the members and no other person and the company has since ratified that breach;
- Where misconduct arose due to duress;
- Proper and reasonable delegation by a director of its function to another person;
- Temporary ill health causing a lapse of judgment or a temporary absence which lead to the company failure or events referred to in the disqualification claim.
The Answer is Yes. In order for the Secretary of State to be able to rely on evidence of misconduct in collateral companies to try and secure a disqualification, it must firstly show some form of misconduct in respect of the lead company.The Secretary of State cannot simply disqualify a director solely on the basis of conduct in collateral companies if there is no evidence of misconduct in the lead company.However, it is important to understand that in respect of the lead company, the Secretary of State only needs to show there is some form of misconduct even if that misconduct does not constitute unfitness. The very fact there is some form of misconduct then enables the Secretary of State to introduce evidence of misconduct in the collateral companies, which if shown to constitute unfitness, can then form the basis of a disqualification.If unfitness is actually established in respect of the lead company, then any additional unfit misconduct proved in the collateral companies as well will simply be used to increase the length of the disqualification imposed against the individual concerned.
The Answer is Yes. The court will take into account the fact that there have been previous company failures whilst you were a director.However, this is only by way of background information and the best way to deal with this issue is to have explanations ready, if required, as to why those companies failed.
The Answer is Yes. These are contained in Parts 1 and 2 to Schedule 1 of the CDDA 1986.Under Part 1 the court can take in to account the following matters when deciding if a director’s conduct constitutes unfitness:
- Any misfeasance or breach of any fiduciary or other duty by the director in relation to the company, including in particular any breach by the director of a duty under Chapter 2 of Part 10 of the Companies Act 2006 (general duties of directors) owed to the company.
- Any misapplication or retention by the director of, or any conduct by, the director giving rise to an obligation to account for, any money or other property of the company.
- The extent of the director’s responsibility for the company entering into any transaction liable to be set aside Part XVI of the Insolvency Act 1986 (provisions against debt avoidance).
- The extent of the director’s responsibility for any failure by the company to comply with any of the following provisions of the Companies Act 2006:
- Section 113 (keeping a register of members);
- Section 114 (making the register to be kept available for inspection);
- Section 162 (keeping a register of directors);
- Section 165 (keeping a register of directors’ residential addresses)
- Section 167 (the duty to notify registrar of changes of directors);
- Section 275 (keeping a register of secretaries);
- Section 276 (the duty to notify registrar of changes of secretaries);
- Section 386 (the duty to keep accounting records);
- Section 388 (knowing where and for how long accounting records to be kept);
- Section 854 (the duty to make annual returns);
- Section 860 (the duty to register charges);
- Section 878 (the duty to register charges; companies registered in Scotland).
- The extent of the director’s responsibility for any failure by the directors of the company to comply with the following provisions of the Companies Act 2006:Section 394 or 399 (the duty to prepare annual accounts):
- Section 414 or 450 (the approval and signature of abbreviated accounts); or
- Section 433 (the name of signatory to be stated in published copy of accounts).
- The extent of the director’s responsibility for the causes of the company becoming insolvent.
- The extent of the director’s responsibility for any failure by the company to supply any goods or services which have been paid for (in whole or in part)
- liable to be set aside under S.127 or SS.237 to 240 of the Insolvency Act 1986; or
- challengeable under S.242 or S.243 of that Act or under any rule of law in Scotland.
- Paragraph 47 of Schedule B1 (company’s statement of affairs in administration);
- S.47 (statement of affairs to administrative receiver);
- S.66 (statement of affairs in Scottish receivership);
- S.99 (directors’ duty to attend meeting; statement of affairs in creditors’ voluntary winding- up;
- S.131 (statement of affairs in winding up by the court);
- S.234 (duty of anyone with company property to deliver it up);S.235 (duty to cooperate with liquidator, etc)
- S.235 (duty to cooperate with liquidator, etc).
▶ Will the court take in to account any current director/management roles when considering unfitness in the former company?
The Answer is No. The fact that you might well be a currently successful and competent director is irrelevant. It is the conduct in the failed company which will determine the finding of unfitness.
▶ Will the court consider the question of unfitness in the context of how the company was run at the time?
Yes. In terms of director disqualification, the conduct of the director must be evaluated in context. The Director’s side of the story is thus crucially important. We can help.The Court may also take into account the director’s conduct in respect of other companies that have been placed into insolvency proceedings, regardless of how long ago this was.
Examples of conduct that may not amount to unfitness to be a company director (and hence not leading to a disqualification order being made), are as follows:
- Where a failure by the directors to understand his/her responsibilities had damaged trade creditors as a result of a combination of circumstances which were beyond his/her control.
- Non-payment of taxes to HMRC, without any evidence of a deliberate policy of non-payment.
- Where a single “lapse of judgment” had occurred by a director who had otherwise run his business very well.
- Over reliance on another director who assured him that the problems in the business were being dealt with when in fact they were not. Such reliance must however be reasonable in the circumstances of that case.
- Not seeking professional advice regarding the sale of specific assets of the business – leading to its insolvency.
- Not filing VAT returns prior to the company entering in to liquidation.
Proving unfitness to be a company director falls in to 2 stages:
- Firstly the Secretary of State needs to establish as facts (to a requisite standard of proof), the matters on which the allegation of unfitness is based.
- Secondly, the court must be satisfied that the conduct alleged is sufficiently serious to warrant disqualification.
Section 6(1) of the CDDA 1986 states:The Court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied:
- that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and
- that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.
Yes. Disqualification under section 6 of the CDDA, 1986, is mandatory.If a court finds that the complaints alleged against the director constitute unfitness, the making of a disqualification order is mandatory. The Minimum period of disqualification is 2 years.
Director Disqualification Undertakings Questions
Ordinarily a Director Disqualification Undertaking takes effect 21 days after the date it has been accepted by the Secretary of State.
It is always possible (and sensible) to try and negotiate the period of director disqualification offered by the Secretary of State downwards.Other information on this website deal with the importance of trying to negotiate the period of director disqualification downwards, particularly if a person is thinking about seeking permission to remain a director despite being disqualified. Contact us for help and advice.The best way to negotiate a period downwards is by producing a detailed written response backed by documentary evidence countering the allegations made. If this can be produced, then there is the opportunity to negotiate the period of disqualification downwards – although such an outcome cannot be guaranteed.
A Director Disqualification undertaking can be given either before or after the issue of formal legal proceedings by the Secretary of State.Prior to the issuing of proceedings, before issuing formal proceedings, the Secretary of State will send a section 16 letter to an individual asking whether he/she will agree to give a voluntary undertaking not to act as a director. It is of course open to that person to challenge the appropriateness of the threatened disqualification by defending the formal legal proceedings, but if the person is unable or unwilling to fight a claim (for example due to financial reasons), then he/she can sign a Disqualification Undertaking which would mean that formal legal proceedings are no longer necessary.The question of costs is important as if a Disqualification Undertaking is given by a person prior to the issue of legal proceedings, the Secretary of State will nearly always waive any claim for payment of its legal costs.However, it is important to understand that if a disqualification undertaking is given after the issue of legal proceedings, the person nearly always becomes liable for the Secretary of State’s legal costs up to and including the time it is accepted (although very early on the Secretary of State may waive any such costs to conclude matters quickly).
▶ What conditions need to be satisfied before the Secretary of State can accept a Disqualification Undertaking?
There are 2 main conditions that need to be satisfied:
- The Secretary of State must be satisfied that the person offering the undertaking is or has been a director of a company which has at any time become insolvent and that the conduct of that person as director of that company makes him unfit to be concerned in the management of a company.
- Secondly the Secretary of State must believe that it is in the “public interest” that he should accept a Disqualification Undertaking instead of applying or proceeding with an application for a formal Disqualification Order.
Section 1A (1) of the CDDA 1986 enables a person to give an undertaking meaning that:
- He or she 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 permission of the Court, and
- He or she will not act as an insolvency practitioner. Director Disqualification undertakings are only available where disqualification proceedings are proposed following the insolvency of a company (Section 6 of the Company Directors Disqualification Act 1986) or following an investigation of a company by the Secretary of State (Section 8 of the Company Directors Disqualification Act 1986).
The answer is No. Director Disqualification proceedings relate to the conduct of the individual at the time of the problem.
The sooner the Director seeks advice, the lower the costs are likely to be. As long as you deal with matters early, costs can be limited.The golden rule is that the earlier you deal with a threatened claim, the cheaper it is. Ignoring threatened claims is not advised as they are unlikely to be dropped and you could, if formal proceedings are issued, be faced with paying the Secretary of State’s legal costs as well. Contact us for help and advice.
The answer is yes pursuant to section 8A of the Company Director Disqualification Act 1986.
The disqualification order or disqualification undertaking, if you voluntarily enter into it, is only there to deal with the disqualification claim.If there are other claims which may be bought against you in respect of the liquidated company, then the liquidator will need to prove these claims in their own right. A liquidator cannot rely on the fact of a disqualification to try and bring other claims against an individual.
Your circumstances might change and you might want to become a director or involved in the management of a business again sometime in the future.If that is the case you will either have to wait for the period of disqualification to expire, or make an application to court for permission to become a director. Two things are important:
- The longer the disqualification period, the longer you will have to wait for it to expire and the more serious the disqualification will impact you personally.
- The longer the disqualification period, the more difficult it is to obtain permission from the court to become a director despite disqualification (although not impossible).
This is a simple procedure designed to streamline the director disqualification process, as set out in section 1A of the Company Directors Disqualification Act 1986.Essentially a person agrees not to act as a director for a set period of time based on a schedule of “agreed” unfit conduct in the liquidated company giving rise to the disqualification. For more information regarding undertakings, contact us.
General Director Disqualification Questions
That person can be disqualified from acting as a director and can face a fine or imprisonment.
If you act in breach of your director disqualification order, the penalties can be:
- It can lead to imprisonment for up to 2 years and/or a fine [section 13 of the Company Director Disqualification Act 1986].
- You can be held personally liable for the Company’s debts for the time you acted in breach of the disqualification order [section 15 of the Company Director Disqualification Act 1986].
There is a process by which a “voluntary undertaking” can be given to the Secretary of State not to act as a director for an agreed period of time.
▶ How long has the Secretary of State got to bring a claim against me for director disqualification?
2 years from the date of insolvency – this is either the date when the company was placed into liquidation (by a winding-up order or a meeting of creditors) or the day an Administrator/Administrative Receiver was appointed.
▶ What conduct can give rise to a finding of “unfitness” under section 6 of the Company Director Disqualification Act 1986?
The following are common grounds in alleged unfitness in respect of the liquidated company:
- Conducting a policy of deliberately not paying HMRC debts
- Failure to keep maintain, preserve or deliver up proper accounting records
- Trading to the detriment of creditors generally or specific creditors – this normally involves demonstrating a policy of non-payment of certain creditors;
- Paying one creditor in priority to others when insolvency is imminent;
- General public interest breaches including mis-selling or misrepresenting sales to customers or retaining customer deposits;
- Wrongful trading of the company [Section 214 Insolvency Act 1986];
- Fraudulent trading [Section 213 Insolvency Act 1986];
- Trading in breach of legal and regulatory requirements – for example being involved in financial services schemes without having proper authority to provide such services by the FSA;
- Misapplication or retention of company money or property, either for less than the market value or for no consideration;
- Failing to prepare/file annual accounts or any other statutory returns to Companies House;
- Failing to deliver up company documents and property.
▶ Can I act as a director or be involved in the management of a Limited Company once subject to a director disqualification order?
Yes but only if permission is given by the court for you to do so.This is specifically provided for under Section 17 of the Company Directors Disqualification Act 1986. This is a separate application that the Director makes to the Court. We regularly deal with such applications.
Yes. The Company Director Disqualification Act 1986 only applies to directors and managers of companies and Limited Liability Partnerships.You can be a sole trader or partner. If you require advice on restructuring your business arrangements, we can assist.
Director Disqualification has three distinct bands:
- The lowest category of 2-5 years.
- This category largely relates to reckless or negligent conduct as a director. A mid category of 6-10 years.
- This category is classed as serious, and relates to conduct which is deemed most serious. The highest category of 11-15 years.
The meaning has been interpreted extremely widely.Every business is run differently. The courts look at matters on a case by case basis to assess whether a person’s role is effectively involved in the management of a business rather than that of an employee. Some factors do however indicate that a person is acting beyond the role of a mere “employee” so as to be involved in the management of a business:
- Attending board meetings;
- Being a signatory on the company bank account;
- Signing VAT or Tax Returns;
- Being involved in strategic planning;
- Otherwise making decisions that no other person can make and/or having no one to account to;
- Dealing with external professional advisers.
A “Director” is not generally defined in legislation, but the term relates to any person occupying the position of director by whatever name called. This can include senior managers, partners, trustees or governors.Conventionally, a director appointed to a company’s board and registered at Companies House is referred to as a "De Jure" director. The term director also includes non-executive directors who, although not having a role in the company’s day-today affairs, have identical responsibilities to the executive directors (i.e. the active directors) in respect of company affairs and duties under the Companies Acts.Other individuals may also be defined as a director and therefore be subject to the same responsibilities and requirements of ordinary De Jure directors. These generally fall into one of two definitions, either a “Shadow Director” or a “De Facto Director”.“Shadow Directors” are specifically included within the definition of a director by statute, which describes such persons as, “a person in accordance with whose directions or instructions the directors of a company are accustomed to act,” although this excludes roles where the directors acted in reliance of an individual acting in a professional capacity (e.g. an accountant).“De Facto Directors” are not generally defined by the legislation but are well recognised in common law as comprising those individuals who act as a director even though not validly appointed as so.Contact us if you have a director disqualification problem.
If a disqualification order is made, you cannot, without permission of the court:
- be a director of a company;
- be concerned in any way whether directly or indirectly in the promotion;
- formation or management of a company;
- be a liquidator or administrator of a company;
- be a receiver or manager of a company’s property.