Director disqualification proceedings are complex legal processes that can have severe consequences for individuals involved. When facing such proceedings, it may be tempting to handle the matter personally, without seeking the guidance and expertise of a professional.
However, embarking on director disqualification proceedings without professional representation can lead to critical mistakes and missteps that can jeopardize one’s defense.
This introductory paragraph will discuss the potential pitfalls of dealing with director disqualification proceedings without professional instruction, highlighting the importance of seeking qualified legal assistance to navigate this intricate and high-stakes process effectively
1. Trying to deal with the legal proceedings yourself
One of the common mistakes directors make in director disqualification proceedings is attempting to handle the legal process themselves. With the sincere intention of cooperating and resolving the matter swiftly, directors often respond to initial enquiries from the Insolvency Service, hoping it will lead to the withdrawal of legal claims against them. However, what directors fail to realize is that once the Insolvency Service initiates these initial enquiries, they are likely to proceed with formal legal proceedings unless compelling reasons are provided to persuade them otherwise.
The seemingly harmless nature of these initial enquiries can lull directors into a false sense of security, causing them to provide answers and information that ultimately undermine their chances of defending the claim. Directors often overlook the fact that any responses they provide, without the guidance of an experienced solicitor, can later be used as evidence against them in the disqualification claim.
Directors may unwittingly disclose information or submit documents they believe to be helpful, only to discover that they work against their favour in the long run.
2. Avoiding communications entirely
Another significant mistake that directors often make in director disqualification proceedings is avoiding communications altogether, naively hoping that the threat of legal proceedings will simply disappear. However, this approach is highly ill-advised. Once the Insolvency Service has reached out to a director with initial inquiries, it signifies that the director is now under their scrutiny.
Ignoring or failing to respond to these letters is unlikely to lead to the claim being dropped. Instead, it is crucial to cooperate with the Insolvency Service and proactively engage in detailed correspondence to persuade them against pursuing formal disqualification investigations.
By providing comprehensive and compelling responses, directors have a better chance of influencing the Insolvency Service’s decision and potentially avoiding further legal action
3. Feeling pressured to giving a quick response
Directors frequently find themselves under pressure to provide quick responses when faced with deadlines set by the Insolvency Service. However, it is important for directors not to succumb to this pressure. The Insolvency Service often imposes deadlines in an attempt to obtain hurried responses, as it is administratively convenient and helps them meet their annual director disqualification targets.
Directors must be cautious not to fall into this trap. It is crucial to understand that there is no legal obligation to respond within the specified deadlines outlined in the Insolvency Service’s letters. Directors should bear in mind that any responses they provide can be included as evidence in the formal affidavit of the Secretary of State if legal proceedings are initiated.
Therefore, it is vital that any response is carefully considered and well thought out, even if the director decides not to seek expert legal advice. Directors have the right to request sufficient time to respond and should not feel pressured to rush their replies.
Hastily prepared responses can often be used against directors, weakening their chances of successfully defending against the disqualification claim. Taking the necessary time to craft well-prepared responses is crucial to protecting their interests in the proceedings
4. Responding without access to relevant company documentation
A common mistake made by directors in director disqualification proceedings is responding to enquiries without accessing relevant company documentation, relying solely on their memory of events that may have transpired many years ago. It is important for directors to understand that they have the right to request access to any pertinent documentation that they believe will assist in formulating their responses. Such documentation is typically held by the liquidator of the company in question.
- If a director requires access to company information, it is imperative to make the necessary requests. Directors have the entitlement to ask the liquidator for a comprehensive inventory of all company documentation if they believe that it will aid in identifying the required documents for their response. However, it is crucial to inform the Insolvency Service about this process and clarify that the timing of the response will depend on gaining access to this information.
- By ensuring access to relevant company documentation and incorporating it into their responses, directors can provide more accurate and well-supported explanations, strengthening their position in the disqualification proceedings. Failing to request and consider such documentation may result in incomplete or inaccurate responses that can negatively impact the director’s defense
5. Failing to recognise that the Insolvency Service must adhere to certain time limits
Directors often fail to recognise that the Insolvency Service is bound by specific time limits when it comes to initiating formal legal proceedings.
It is important to note that the Insolvency Service has a window of three years from the date of administration or liquidation of the company to commence such proceedings. If they fail to bring the administration or liquidation proceedings within this time frame, they are barred from pursuing a claim without obtaining permission from the court.
In many cases, the Insolvency Service tends to leave matters until close to the administration or liquidation deadline before initiating enquiries against former directors. However, it is crucial to remember that the Insolvency Service is obligated to provide individuals with sufficient time to respond adequately to their enquiries and letters.
If they have delayed the process and are now pressuring for a swift response, the responsibility lies with them, not the individual they are addressing. The person receiving the enquiries is entitled to request adequate time to respond, especially considering the often comprehensive allegations being made.
A director must not feel pressured into providing a quick response due to the Insolvency Service’s sluggishness in initiating enquiries. Similarly, they should not feel compelled to offer voluntary undertakings in exchange for the Insolvency Service refraining from issuing proceedings, particularly if the Insolvency Service has left matters until close to the deadline.
This is especially true if the director believes they have a genuine defense against the claim. Individuals facing the threat of a director disqualification claim have the right to be granted sufficient time to respond to such a significant and serious matter
6. Failure to ask for the draft evidence against you
One critical mistake that individuals facing director disqualification proceedings often make is failing to request the draft evidence against them. When served with a “section 16 notice” letter indicating the intention to initiate proceedings unless a voluntary undertaking is given, it is important not to panic and hastily provide an undertaking without fully understanding the disqualification allegations.
As a person facing legal proceedings, you have the right to request a copy of the draft affidavit prepared by the Insolvency Service, which outlines the basis of the claims and the evidence against you. In order to proceed with a claim, the Insolvency Service must swear a detailed affidavit, akin to a witness statement, which sets out the various allegations and supporting evidence. By the time the section 16 letter is issued, a draft of this affidavit should already be prepared.
It is within your entitlement to review the draft affidavit, either to assist in formulating your response or to seek expert legal advice. Doing so is highly advisable as it provides a more comprehensive understanding of the allegations against you, surpassing the brief details often provided in the section 16 letter.
Additionally, you can also request the supporting documents that accompany the draft affidavit evidence, and it is recommended that you do so. If the Insolvency Service fails to provide this information and proceeds to initiate a legal claim without giving you a proper opportunity to consider the evidence and respond accordingly, their failure to provide such crucial information can be used against them.
By ensuring access to the draft evidence and supporting documents, you can effectively assess the case against you and mount a robust defense. Failing to request and review this information may result in being ill-prepared to counter the allegations and could potentially undermine your defense strategy.
7. Failure to negotiate a voluntary undertaking to be disqualified
One crucial mistake that directors often make is failing to negotiate a voluntary undertaking to be disqualified, assuming that the time period offered in the Section 16 letter is non-negotiable. However, this is not the case.
Voluntary undertakings can be subject to negotiation before they are accepted, typically following a comprehensive response letter to the Insolvency Service that outlines the grounds for defense. It is always in the best interest of directors to strive for the lowest possible period of undertaking.
Reducing the period of undertaking has multiple advantages. Firstly, the overall duration of the disqualification ban will be shorter, allowing for a quicker return to directorship. Additionally, a reduced period of undertaking can also aid in seeking leave to remain a director of a company despite being subject to the disqualification ban. This can have significant implications for your future business career and opportunities.
By engaging in negotiations and presenting a strong defense, directors have the opportunity to secure a more favorable outcome in terms of the duration of the undertaking. It is essential to understand that voluntary undertakings are not set in stone and can be influenced through effective negotiation and advocacy.
8. Running a company “behind the scenes”
Running a company “behind the scenes” as a banned director is a mistake that some individuals make, thinking they can still exert control by appointing other directors while operating in the background. However, this practice, known as being a “shadow director,” is well recognised by the Insolvency Service and other authorities, and it comes with serious consequences.
Banned directors who engage in this behavior often fail to realize the gravity of breaching a disqualification order. It is not only a serious offense, but also a criminal offense that can result in fines or imprisonment. Furthermore, such actions can make the banned director personally liable for the company’s debts, particularly those incurred during the period they acted as a shadow director. This behavior is regarded as a clear violation of the court order terms.
The Secretary of State actively monitors whether banned directors are acting in breach of the court order and receives reports from various sources who are aware of director bans, as this information is publicly available.
Rather than risking the severe sanctions associated with such violations, it is advisable to seek professional advice on alternative options, such as seeking permission from the court to continue acting as a director despite the disqualification order.
It is important to note that being a majority shareholder does not grant a banned director the right to control the company. Attempting to manage the business under the guise of being a shareholder while acting in breach of the court order or undertaking is not permissible.
Such actions would effectively classify the banned director as a shadow director, carrying serious consequences. It is crucial not to take unnecessary risks and to adhere to the terms of the court order or undertaking.
9. Acting in the management of a company – avoid the danger
One common mistake that disqualified directors make is taking up another role within an associated or different company at a senior level as an employee, believing that they are not breaching the court order or undertaking. However, this assumption is not always accurate, particularly in the area of management, which falls into a gray area where individuals have been found guilty of acting as a director despite not being formally registered. This is known as being a “de facto director.”
Engaging in such activities as a de facto director can lead to criminal and committal proceedings, as well as potential liability for the debts of the relevant company, as mentioned previously. This is an extremely risky situation that should be avoided at all costs.
It is strongly advised to seek legal advice before accepting any senior role where there is a possibility of misconstruing your actions as acting in the same capacity as a director. By consulting with legal professionals, you can gain clarity on the potential risks involved and ensure that you are not inadvertently breaching the terms of your disqualification order or undertaking. It is crucial to err on the side of caution and mitigate any potential legal consequences that may arise from acting in a management role that resembles directorial responsibilities.
10. Don’t believe that you can never be a director or involved in the management of a business if subject to a director ban
It is crucial not to believe that you can never be a director or be involved in the management of a business if you are subject to a director ban. There are legal steps that can be taken to potentially allow you to continue in such roles, which can be of paramount importance if your professional career and livelihood depend on it.
To remain a director despite formal disqualification, it is necessary to apply to the court for permission. This application is made under Section 17 of the Company Directors Disqualification Act 1986. You can choose to make this application in conjunction with the signing of a voluntary undertaking to ensure continuity, or you can apply for it at any time before the end of your disqualification period.
It is worth noting that we offer a free assessment with a reputable legal firm, that has achieved a 100% success rate in these applications since 2002. Seeking professional guidance and representation in this matter can greatly increase your chances of obtaining permission to continue as a director.
It is important to recognise that being subject to a director ban does not necessarily mean the end of your involvement in business management.
By taking the appropriate legal steps and working with experienced professionals, you may be able to secure permission from the court and continue your role as a director.
In conclusion, regardless of the stage of the director disqualification process you find yourself in, it is crucial to be mindful of the potential mistakes that can have far-reaching consequences. Whether you are facing initial enquiries, responding to letters, negotiating undertakings, or considering your future involvement in business management, the choices you make can impact your career prospects and expose you to personal financial liabilities.
By seeking professional advice, understanding the legal requirements, and carefully considering your actions, you can navigate the disqualification process with greater confidence and mitigate the potential risks associated with it. Taking proactive measures to avoid mistakes can safeguard your professional reputation and ensure a more favorable outcome in the face of director disqualification proceedings.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.