Director disqualification proceedings can be an arduous and daunting experience, laden with challenges, financial burdens, stress, and emotional turmoil for all parties involved.
The introduction of the disqualification undertaking regime in 2000, however, has provided a voluntary avenue for individuals confronted with director disqualification to seek resolution without resorting to court action.
This regime offers a glimmer of hope, enabling those facing disqualification to take proactive measures and bring the matter to a close on their own terms, thereby potentially avoiding protracted legal battles and further exacerbation of the already distressing circumstances.
A disqualification undertaking is a voluntary agreement where a company director chooses to disqualify themselves from holding the position of a director. It is an option favored by many directors as it allows them to put the matter of disqualification behind them and move forward. Compared to full disqualification proceedings, a director disqualification undertaking can be a less costly and less stressful alternative.
What are director disqualification undertakings?
Director disqualification undertakings are an alternative resolution mechanism introduced in 2000 as part of the Company Directors Disqualification Act. They offer individuals facing director disqualification an opportunity to voluntarily agree to a disqualification order without going through the court process.
Under a disqualification undertaking, the director acknowledges their unfit conduct and voluntarily agrees to be disqualified from acting as a director for a specified period, typically between 2 to 15 years. By accepting a disqualification undertaking, directors can bring an end to the disqualification proceedings and avoid the costs, uncertainties, and potential reputational damage associated with a court hearing.
When considering a disqualification undertaking, it is crucial for directors to carefully assess the implications and potential consequences. Accepting a disqualification undertaking is a serious decision that may impact their future career prospects and involvement in business activities.
Furthermore, the disqualification order becomes part of the public record, accessible to anyone conducting due diligence or background checks on the individual. Despite these considerations, director disqualification undertakings can be a viable option for individuals who wish to take responsibility for their actions, acknowledge their unfit conduct, and avoid the adversarial nature and public scrutiny associated with court proceedings.
It is important to note that disqualification undertakings are not available in all cases. In certain circumstances, such as cases involving serious misconduct or fraud, the Insolvency Service or other relevant authorities may deem it necessary to pursue director disqualification through the courts.
However, for less severe cases where the director acknowledges their unfit conduct and is willing to accept the consequences, disqualification undertakings provide a voluntary alternative that can help expedite the resolution process and allow the individual to move forward from the disqualification with a sense of closure.
Any person whose undertaking is accepted agrees not to:
- 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 they have the permission of the court
- Act as an insolvency practitioner.
A director disqualification undertaking that is approved by the Secretary of State has the same legal standing as a court-issued order. Therefore, seeking professional legal counsel before submitting an undertaking is highly advised.
Read our: Guide on director disqualification
Time frames of director disqualification
The maximum length of the director’s disqualification period is 15 years. There are three levels of disqualification for directors
- 2-5 years (usually for reckless or negligent conduct as a director)
- 6-10 years (usually for serious misconduct which is more detrimental to the public interest)
- 11-15 years (for the most severe breaches, usually fraudulent or otherwise serious/criminal behaviour.
However, directors typically receive a somewhat shorter director disqualification period (up to a reduction of 12 months) if a disqualification undertaking is offered
How are director disqualification undertakings offered?
There are two scenarios in which director disqualification undertakings are available. They are typically negotiated when director disqualification actions are suggested after corporate insolvency. They can also be decided upon once the Secretary of State has looked into a corporation.
The Secretary of State will write to the person they believe has to be removed from office to start the process and give them the option of adopting a voluntary director disqualification agreement. It’s referred to as a Section 16 letter. A timeline for the voluntary director disqualification will be provided in the letter.
In order to help the director understand the effects of director disqualification and their options, supporting data will also be given to them. The Secretary of State will also provide a summary of the grounds for the director’s disqualification to the director.
If you have a Section 16 letter, it is up to you to choose whether to voluntarily disqualify yourself. As an alternative, you have the right to oppose the looming director disqualification through official legal action. Even if you decide to accept a director disqualification undertaking, you might still attempt to reduce the length of the provided disqualification period.
Benefits of accepting a disqualification undertaking
A director disqualification undertaking typically has the following advantages:
- Bringing the matter to an immediate conclusion
- Avoiding court proceedings
- More reasonable costs*
- A less stressful and straightforward process
- Usually possible to get a reduction to the director disqualification period (up to 12 months).
A disqualification undertaking, however, is not appropriate in every situation. To ensure that you are aware of any potential bad outcomes and to determine if you could completely avoid disqualification, you should seek specialised legal assistance. You must be fully informed because breaking a disqualification undertaking can result in extremely serious repercussions (such as fines and jail time).
*The Secretary of State will almost always forgo any claim for payment of its legal fees if a director disqualification undertaking is delivered before director disqualification proceedings officially begin. You can end up being responsible for the Secretary of State’s legal fees following the director disqualification legal issues. To ensure a swift resolution of the matter, these restrictions might occasionally be lifted.
When does the director disqualification undertaking come into force?
Even if official director disqualification proceedings are started, you can continue to serve as a director of your company until a formal court ruling or an acceptable director disqualification undertaking is made. This procedure could take up to two years if you choose to go to court.
Before or after official legal director disqualification procedures are issued, a director disqualification undertaking may be reached. A director disqualification undertaking may occasionally even be agreed upon during legal procedures. Although it is typically not advised, some directors choose to go this path for pragmatic reasons. For instance, to provide them the time they require to complete a task that they can only complete while they are still a director.
The disqualification undertaking, once agreed upon, will take effect 21 days after being signed by the director and secretary of state.
Alternatives to accepting a director disqualification undertaking
It is feasible to contest an allegation of inappropriate conduct and present your side of the story in court rather than requesting a disqualification undertaking. Summit Law actually specialises in fending off director disqualification accusations, and we’ve been successful in getting the Insolvency Service to drop legal action against clients from a wide range of businesses.
Bottom line: If the Insolvency Service doesn’t think a case is in the public interest, it cannot pursue it. The Secretary of State must also be convinced that the individual providing the director disqualification undertaking engaged in behaviour that rendered them unfit to be involved in company management. Therefore, director exclusions are still relatively uncommon.
Should you accept an disqualification undertaking?
No, in spite of this, voluntary director exclusions are typically recognised. Therefore, it would be better if you did not accept director disqualification as inevitable without seeking specialised legal guidance. We might be able to convince the Insolvency Service to impose a lesser period of disqualification or drop your case entirely by carefully reviewing all the facts of your unique circumstances.
We do recognise, however, that many directors would like to avoid going to court, frequently out of financial concern. Others would rather have a predetermined outcome than an uncertain one. In order to determine the best course of action for you, we will walk you through all of your options.
Conclusion
In conclusion, director disqualification should not be considered an inevitable outcome for those facing such proceedings. It is crucial for directors to seek expert legal advice and fully understand their options before making any decisions, including offering a disqualification undertaking.
By consulting professionals who specialise in director disqualification cases, individuals can gain valuable insights into the strength of their case and explore alternative avenues to resolve the matter.
To take the first step towards obtaining the guidance needed, I encourage directors to complete the online enquiry form and connect with experienced professionals who can provide the necessary support and representation throughout the director disqualification process.
Your future as a director may depend on making informed decisions, and seeking professional advice is a proactive way to protect your rights and interests.
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.