It’s not uncommon to hear about former company directors being disqualified from holding directorships once their company has been put into a formal insolvency process.
How is a director disqualified?
An administrator, liquidator or receiver will submit ‘D’ forms to the Insolvency Service. If it is considered to be in the public interest to bring a prosecution, the Insolvency Service will then write to the director to let he or she know that they intend to commence disqualification proceedings. Currently, the action must be brought within two years of the company entering a formal insolvency process, unless an application is made to court to extend this period.
The Insolvency Service may then issue court proceedings against the director, following which a court may order that they shall not be a director of a company or in any way be concerned with the promotion, formation or management of a company or an LLP for a specified period.
A director can be disqualified for between 2 and 15 years, depending on the seriousness of the offences.
Why might someone be disqualified?
There are a wide range of breaches of directors’ duties that may lead to disqualification proceedings, including:
- Trading while the company was insolvent
- Misuse of company funds
- Failing to maintain proper records
- Failing to cooperate with an administrator, liquidator or receiver
What will happen if a person acts in contravention of a director disqualification order?
This is a criminal offense and a person can be liable for a fine or imprisonment for up to two years. They will also be personally liable for all the relevant debts of the company they are managing. Any person involved in the management of a company who acts on the instructions of a person subject to a disqualification order also risks being held personally liable for the debts of the company.
What are disqualification undertakings?
Instead of initiating disqualification proceedings, the Insolvency Service may accept a voluntary disqualification undertaking from a director to speed up the process. The advantage of this is the former director will not need to pay the costs of going to court and will often be given a discount on the length of any disqualification period.
How can an action be defended?
The first step is to request disclosure of the company’s books and records so that these can be reviewed with reference to the allegations made to assess the likely outcome of any disqualification proceedings. It is then necessary to prepare a thorough response to the Insolvency Service’s initial letter, as this may deter them from bringing proceedings at all, or result in a lower period of disqualification being pursued.
The Insolvency Service may issue disqualification proceedings and the decision could eventually be made by a judge at trial. If the proceedings are successfully defended, the Insolvency Service will normally be ordered to pay the director’s costs but, conversely, the director will generally be required to pay the Insolvency Service’s costs if an order is made against him. These can be substantial and this, together with the reduced disqualification periods generally associated with disqualification undertakings, means that defending proceedings must be considered very carefully and expert advice taken at an early stage.
Can a person get permission to act as a director if disqualified?
Yes, the courts have power to grant permission to a person who is disqualified to act as a director where the need for them to do so outweighs the public interest in them being disqualified. Permission could, for example, be granted if the survival of the company depended on the involvement of the disqualified person. However, the Insolvency Service would want to make sure that proper safeguards are in place to prevent the same abuses taking place. It is therefore unlikely that someone subject to a disqualification order would be allowed to become a sole director of a company.
For more information on this, or any other insolvency matter, contact James Robbins on 01772 208503 or James.Robbins@harrison-drury.com