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Company Directors disqualification proceedings and disqualification compensation orders

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The threat of being disqualified as a director, or even being contacted by the Insolvency Service with regard to your former Company can be quite daunting and can come as quite a surprise.

Company Directors Disqualification Act (CDDA) proceedings are where the Insolvency Service, on behalf of the Secretary of State, makes allegations against a former director (usually by way of a “section 16” letter) claiming that the former director is “unfit” to be concerned in the management of a Company. The Insolvency Service would then seek to issue court proceedings for a disqualification order. However, in most circumstances the Insolvency Service will accept disqualification undertakings in order to save the costs of court proceedings. If CDDA proceedings are alleged, then an individual could face disqualification from being a company director for any period of between 2 and 15 years.

In October 2015 the Government amended the CDDA, to enable the Insolvency Service to apply for a compensation order, if they form the view that a director who is subject to a disqualification order or undertaking, has caused quantifiable loss to one or more creditors of an insolvent company, by virtue of their misconduct.

When (why) would a director need this service?

As a former director/officer of a liquidated company, if you have received one of the following from the Insolvency Service, you ought to seek legal advice immediately, to explore the options available to you:

  • A letter seeking further information from you in connection with your conduct in connection with the former company; or
  • A letter labelled as a “section 16” letter; or
  • A letter stating that the Secretary of State will accept an undertaking; or
  • A claim form and an affidavit, setting out the claim against you; or
  • Correspondence from the Insolvency Service threatening to apply for a compensation order or seeking a compensation undertaking.

CDDA proceedings can also be taken against individuals who were not directors but were involved in the management of a Company and are commonly referred to as “de facto” directors or “shadow” directors.

How is unfitness assessed and why have the Insolvency Service decided to make these allegations against me?

When a company goes into liquidation or administration, the Liquidator or Administrator will produce a report to the Insolvency Service and provide a recommendation, as to whether they think, based on their investigations, the director should be disqualified. In April 2016, the Government implemented new procedures to enable a Liquidator or Administrator to provide their reports online, thereby making it easier for them to recommend that a director be disqualified.

Often before informing you that CDDA proceedings will be brought against you, the Insolvency service or the Liquidator will ask you to complete a questionnaire. If later disqualification proceedings are brought against you then the content of the questionnaire may be used against you. It is therefore important that you obtain legal advice from the outset and shortly after your Company has gone into Liquidation/Administration.

In order to assess whether CDDA proceedings should be brought against a director the Insolvency Service (and subsequently the court), will consider a wide range of matters which may determine that a director is “unfit” including:

  • Any misfeasance or breach of any fiduciary duty by the director;
  • Allowing a company to continue trading when it can’t pay its debts;
  • Failing to keep proper company records;
  • Using company money or assets for personal benefit;
  • Breaches of the Companies Act 2006; and
  • The frequency of any conduct of the director falling within the above matters

For a full list of matters which may determine that a director is unfit please see schedule 1 of Company Directors Disqualification Act 1986.

Can I challenge the allegations being made against me?

In short, yes you can! Each case is dependent on its own merits, however, depending on the circumstances and the nature of the allegation, there are some examples of possible challenges that can be raised, as set out below:

  • The threshold for “unfitness” has not been met;
  • The Insolvency Service is time barred from bringing CDDA proceedings, as there is generally a two-year time frame for the Insolvency Service to issue proceedings.
  • The director has acted honestly and reasonably;
  • Considering all the circumstances the director ought to be fairly excused; and
  • There has been a procedural or technical error in respect of the allegations raised by the Insolvency Service.

If a director wishes to consider his/her options in relation to challenging any potential action, legal advice should be sought at an early stage and preferably even as early as when the director is dealing with the liquidator or administrator, by completing questionnaires or attending interviews.  

It should be borne in mind that the Insolvency Service is considerably under resourced and if a director can formulate persuasive challenges to the allegations, there is every possibility that the Insolvency Service may not pursue the matter further.

Disqualification Undertakings

As stated above, in most circumstances rather than commencing court proceedings against a director, the Insolvency Service will offer the director the opportunity to provide a disqualification undertaking, which effectively means that the director would admit responsibility and provide an undertaking that he will not be a director or act in the management of a company for a period of time.

The best thing for you to do is seek legal advice as to whether you should accept the undertaking or not. There may be a number of options available to you if you are offered an undertaking or sent a “section 16” letter including the following:

  • Challenge the allegation for the reasons as stated above;
  • Seek to change the proposed terms of the disqualification undertaking;
  • Seek to negotiate the time period in which disqualification is sought.

Remember that it is important to get legal advice and assistance in relation to the scope and the wording of a disqualification undertaking so that you fully understand what you are agreeing to.

Consequences of disqualification

If you are disqualified as a director either by way of a court order or by providing an undertaking you will be subjected to the following consequences:

  • It could result in the Secretary of State seeking a disqualification compensation order against you, if it forms the view that your conduct has caused loss to one or more creditors of an insolvent company;
  • You cannot be a director of a company in the UK or an overseas company that has connections with the UK;
  • You cannot be involved in the forming, marketing or the management of a company;
  • If you breach a court order or undertaking it could lead to imprisonment for up to 2 years and/or a fine;
  • If you breach a disqualification order or undertaking, you could also be personally held liable for the Company’s debts;
  • Your details will be published in a public database of disqualified directors;
  • You will not be able to sit on the board of a charity, school or police authority;
  • You will not be able to be a pension trustee;
  • You will not be able to be a registered social landlord; and
  • It may even be difficult for you to obtain credit.

If you have been disqualified already, then you can apply to the court for leave to be a director or take part in the management of a company. However, you should ensure that you seek legal advice before you consider an application to the court.

What should people do before calling

If you are contacted by the Liquidator or the Insolvency Service, you should explain that you wish to seek legal advice before reverting to them. You should get in touch with us immediately thereafter.

Is it expensive? What are the likely costs?

We will provide you with an estimate of costs at the outset based on the type of work required.

Our lawyers have extensive experience in advising clients who are faced with directors’ disqualification proceedings and have successfully defended clients who were subjected to such proceedings. Our lawyers will be able to provide you with bespoke and cost effective advice tailored to your circumstances.

 

Meet the Company Directors disqualification proceedings and disqualification compensation orders team
Ray Crudgington
Managing Partner
greenwich
02083054224
ray.crudgington@grantsaw.co.uk
Maria Lati
Partner
Head of Residential Property
blackheath
02083054229
maria.lati@grantsaw.co.uk
Mike Clary
Partner
Head of Family
greenwich
02083054237
mike.clary@grantsaw.co.uk
Kalpa Prajapati
Partner
Head of Private Client
blackheath
02083053536
kalpa.prajapati@grantsaw.co.uk
Mario Savvides
Partner
Head of Commercial Property
greenwich
02083053531
mario.savvides@grantsaw.co.uk
Sarah-Kate Jackson
Partner
Head of Litigation
greenwich
02083054236
sarah-kate.jackson@grantsaw.co.uk
Adina-Leigh Collins
Litigation
Solicitor
greenwich
02083053556
adina-leigh.collins@grantsaw.co.uk
Aimal Gram
Commercial Property
Solicitor
greenwich
02083053524
aimal.gram@grantsaw.co.uk
Aisha Mohammed
Residential Property
Solicitor
greenwich
02083054228
aisha.mohammed@grantsaw.co.uk
Aishat Balogun
Aishat Balogun
Family
Solicitor
greenwich
02083054214
aishat.balogun@grantsaw.co.uk
An Le Tran
Commercial Property
Professional Support Solicitor
greenwich
02083054226
anle.tran@grantsaw.co.uk
Angus Young
Litigation
Solicitor
greenwich
02083054225
angus.young@grantsaw.co.uk
Atifha Aftab
Atifha Aftab
Family
Solicitor
greenwich
02083054238
atifha.aftab@grantsaw.co.uk
Bimal Kotecha
Litigation
Solicitor
greenwich
02083053523
bimal.kotecha@grantsaw.co.uk
Charlotte Mandy
Charlotte Warren
Private Client
Solicitor
blackheath
02083054231
charlotte.warren@grantsaw.co.uk
Claire Mac Mahon
Litigation
Solicitor
greenwich
02083053537
claire.macmahon@grantsaw.co.uk
Deborah Taite
Residential Property
Solicitor
blackheath
02083053542
deborah.taite@grantsaw.co.uk
Emily Pearce
Residential Property
Solicitor
greenwich
02083053526
emily.pearce@grantsaw.co.uk
Georgia Beales
Litigation
Paralegal
greenwich
02083054206
georgia.beales@grantsaw.co.uk
James McKimm
James McKimm
Corporate and Commercial
Solicitor
greenwich
02083054217
james.mckimm@grantsaw.co.uk
Jeremy Brooks
Jeremy Brooks
Private Client
Solicitor
blackheath
02083053534
jeremy.brooks@grantsaw.co.uk
Joanna Godden
Notary Public
Notary
greenwich
02083083535
joanna.godden@grantsaw.co.uk
Kim Whitaker
Kim Whitaker
Corporate and Commercial
Head of Corporate and Commercial
greenwich
02083053539
kim.whitaker@grantsaw.co.uk
Laura Danquah
Compliance Manager
greenwich
02083054222
laura.danquah@grantsaw.co.uk
Lauren Smith
Employment and Family
Paralegal
greenwich
02083053543
lauren.smith@grantsaw.co.uk
Mandeep Clair
Family
Solicitor
greenwich
02083054235
mandeep.clair@grantsaw.co.uk
Michael Pope
Employment
Consultant Solicitor
greenwich
02083053540
michael.pope@grantsaw.co.uk
Michelle Pinnington
Michelle Pinnington
Residential Property
Solicitor
greenwich
02083054216
michelle.pinnington@grantsaw.co.uk
Noella Gooden
Employment
Solicitor (Australian qualified)
greenwich
02083053543
noella.gooden@grantsaw.co.uk
Raj Waghela
Raj Waghela
Residential Property
Solicitor
greenwich
02083053529
raj.waghela@grantsaw.co.uk
Randeep Thethy
Randeep Thethy
Residential Property
Solicitor
greenwich
02083054209
randeep.thethy@grantsaw.co.uk
Ruggero Pesciatini
Ruggero Pesciatini
Corporate and Commercial
Paralegal
greenwich
02083054220
ruggero.pesciatini@grantsaw.co.uk
Sarah Conner
Sarah Conner
Private Client
Solicitor
blackheath
02083054234
sarah.conner@grantsaw.co.uk
Simran Lalli
Simran Lalli
Employment
Solicitor
greenwich
02083054208
simran.lalli@grantsaw.co.uk
Susan Collins
Commercial Property
Solicitor
greenwich
02083054200
susan.collins@grantsaw.co.uk
Tatiana Zenina
Tatiana Zenina
Private Client
Solicitor
blackheath
02083054239
tatiana.zenina@grantsaw.co.uk
Trisha Djemal
Trisha Djemal
Residential Property
Consultant Solicitor
blackheath
02083053546
trisha.djemal@grantsaw.co.uk
Tyrone Grant
Residential Property
Head of Leasehold Enfranchisement
blackheath
02083053522
tyrone.grant@grantsaw.co.uk
Denise
Accounts Staff
greenwich
02088586971
enquiries@grantsaw.co.uk
Jayne Lye
Support Staff
Office Manager
greenwich
02083054204
jayne.lye@grantsaw.co.uk
Jamie
Support Staff
Head of IT
greenwich
02088586971
enquiries@grantsaw.co.uk
Kasia
Accounts Staff
greenwich
02088586971
enquiries@grantsaw.co.uk
Michael Tobin
Michael Tobin
Support Staff
Marketing and Business Development Manager
greenwich
02083053550
michael.tobin@grantsaw.co.uk
Sue Holness
Support Staff
Customer Services
greenwich
02083054221
sue.holness@grantsaw.co.uk