COMMON MISTAKES IN DIRECTOR DISQUALIFICATION CLAIMS

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1 10 COMMON MISTAKES IN DIRECTOR DISQUALIFICATION CLAIMS 6 Coldbath Square London EC1R 5HL T: F: DX No Clerkenwell E: info@franciswilksandjones.co.uk

2 1 Trying to deal with the claim yourself Often with the best of intentions, directors will respond to enquiries from the Insolvency Service in the belief that their cooperation will help have the claim dropped against them. What directors do not realise is that once enquiries are underway, the chances are that the Insolvency Service will carry on the claim unless cogent reasons are given to persuade them to drop the case. Often the initial enquiries seem innocuous and easy to answer. However, this is a standard approach and bluntly directors are often lulled in to a false sense of security and provide answers which are detrimental to their claim. What is not often realised by directors is that any responses written by them without the benefit of legal advice can later be used against them as part of the evidence in a claim for their disqualification. It is very easy to say things and provide documents which you believe to be helpful but which in reality count against you. Taking early advice avoids these potential problems and can make the difference to the claim being dropped entirely without proceedings being issued. 2 Avoiding communications entirely Avoiding all communications in the hope that the claim will go away is never a good idea. If the Insolvency Service has written to the director making enquiries, the fact is that you are now on their radar. If you fail to answer any of their letters, it is highly unlikely that they will simply drop the claim. It is better to cooperate with the Insolvency Service and seek to persuade them by detailed correspondence not to continue with a formal claim. This would appear to conflict with our advice in the previous section. This is not the case, but rather directors should cooperate with the Insolvency service in an informed manner which is protective of their own interests, for the above reasons. This is where we can assist as we have detailed experience of the risks and personal liability that you face in these situations. 3 Feeling pressured to giving a quick response Directors can often feel pressured to meet deadlines set out in correspondence from the Insolvency Service. They should not. The 1

3 Insolvency Service is quick to impose deadlines in the hope of obtaining a hurried response which can make their task easier, is administratively more convenient and assists with their annual targets. Do not fall in to this trap. There is no legal requirement to respond by the deadlines set out in their correspondence. Remember that any responses given by you can (and often is) exhibited to the formal affidavit of the Secretary of State if proceedings are issued. It is vital that any response is carefully considered and well thought out, even if you decide not to take legal advice. You are entitled to ask for sufficient time to respond. Don t feel pressured in to responding in a hurry. Hastily put together responses can (and often are) used against directors and damage the prospects of defeating a claim. 4 Responding without access to relevant company documentation Often directors will respond to enquiries without reviewing relevant company documentation, relying mainly on their recollections of events which can be many years old. You are entitled to request access to any relevant documentation which you believe will assist in your response. That documentation will be retained by the liquidator of the company concerned. If you need access to it, make sure you ask for it. Indeed, you are entitled to ask the liquidator for a complete inventory of all company documentation if you consider this will help identify documentation needed for your response. If you do this, make sure you inform the Insolvency Service what you are doing and that the timing of your reply will depend on access to this information. 5 Failing to recognise that the Insolvency Service must adhere to certain time limits What many directors do not realise is that the Insolvency Service has 2 years from the date of administration/liquidation of the company to commence formal legal proceedings. If they do not they are time barred from bringing a claim without the leave of the court. Often the Insolvency Service leaves matters late (i.e. shortly before the 2 year deadline) before commencing enquiries of the former directors. 2

4 However, always remember that the Insolvency Service is obliged to allow individuals sufficient time to respond properly to enquiries. If they have left the matter close to the 2 year deadline and are pressing for a response this is their fault, not yours and you are entitled to seek sufficient time to respond to what are often comprehensive allegations made against you. Do not feel pressured in to giving a quick response due to their slowness in making enquiries. Do not feel pressured in to giving undertakings in return for them not issuing proceedings just because they have left matters close to the 2 year deadline. This is especially true if you believe you have a genuine defence to a claim. You are entitled to have sufficient time to respond on such a serious issue. 6 Failure to ask for the draft evidence against you If you have been served with a Section 16 Notice letter indicating an intention to issue proceedings in the absence of giving an undertaking, do not panic in to giving an undertaking without first understanding the claim against you. You are entitled to see a copy the draft affidavit the Insolvency Service will have prepared setting out the basis of the claims and evidence against you. In order to issue proceedings, the Insolvency Service has to swear a detailed affidavit setting out the various heads of claim and the supporting evidence. By the time the Section 16 letter is sent, there should be a draft of that affidavit evidence already prepared. You are entitled to see the draft affidavit, either to help your response or to enable you to take legal advice. It is always sensible to do this. It will set out in far greater detail the allegations against you rather than the brief details often given in the section 16 letter. You can also ask for the supporting documents which go with the draft affidavit evidence and we would recommend you do this as well. Failure by the Insolvency Service to provide such information can be used against them if they then later issue proceedings without having given you a proper opportunity to consider the evidence and respond accordingly. 3

5 7 Failure to negotiate undertakings Directors often believe that they can only dispose of a claim on an undertaking basis by accepting the period on offer as set out in the Section 16 letter. This is not the case. Undertakings can be negotiated downwards, normally following a detailed letter back to them setting out the grounds for defence. It is always in the directors interest to try and secure the lowest possible period of undertaking. Apart from the obvious fact that the disqualification period itself will be shorter, a reduced period can also assist in seeking leave to remain a director of a company despite being disqualified. It could have important implications on your future business career. 8 Running a company behind the scenes Some directors believe that they can still run a company despite being disqualified normally by appointing other directors in their place whilst controlling the company in the background. This is termed a shadow director and the Insolvency Service and other authorities are well aware of this practice. These directors fail to realise that being in breach of a disqualification order is a serious offence. It is a criminal offence. It can lead to a fine or imprisonment. It can also lead to that individual personally being responsible for the debts of the company going forward (or at least incurred during the period whilst s/he acted as a shadow director). The Secretary of State does check whether disqualified directors are acting in breach of the disqualification order and he does receive reports from various sources who may be aware of your disqualification (as it is publicly available information). Rather than risk the draconian sanctions, take advice on your options such as seeking leave to remain a director despite the disqualification order. Some directors believe that they can control the company despite disqualification due to the fact that they are the majority shareholder. This is not permissible. If you try and manage the business in the guise as a shareholder you will be acting in breach of the disqualification order with all the serious consequences this can carry and will effectively be acting as a shadow director. Do not risk it. 4

6 9 Acting in the management of a company Quite often, upon being disqualified as a director, an individual will take up another role within either an associated company or another company at a senior level on a salary as an employee with the view that s/he is not acting in breach of the disqualification order/undertaking. However, this is not the case and this area of management is a very grey area where such individuals have been found guilty of acting in the capacity of a director, despite not being registered (a de facto director ). With this brings criminal and committal proceedings and the potential liability for the debts of the relevant company as described above. This is not a risk worth taking and you should at least seek professional advice before commencing any such senior role where there is potentially a misconception that you are acting in the same capacity as a director. 10 Believing you cannot be a director/involved in the management of a business if disqualified You may have been disqualified sometime in the past and now have a need to act as a director of a limited company. Alternatively you may be contemplating offering a disqualification undertaking (or be subject to disqualification proceedings) and seeking a way out whilst remaining as a director of your company. Alternatively you may have taken a new role up and want the Court s endorsement that you are not acting in breach of the disqualification prohibition. These problems can be dealt with by seeking leave to act as a director of one or more companies under Section 17 of the Company Directors Disqualification Act 1986, despite having been disqualified. This can be contemplated to time with the signing of a disqualification undertaking (to ensure continuity) or can be applied for at any time prior to the end of your disqualification. This is normally commonly available to directors who have been disqualified at the lower end of the disqualification bracket (up to 10 years) but in extenuating circumstances the Court may grant leave for directors who have been disqualified for higher periods. Francis Wilks & Jones (a trading name of FWJ Legal Limited) 6 Coldbath Square, London, EC1R 5HL T: / F: / DX: Clerkenwell E: info@franciswilksandjones.co.uk W: This document is for general guidance and does not constitute definitive legal advice 5