Company Directors disqualification proceedings and disqualification compensation orders

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.