Director Disqualification Undertaking
Director disqualification proceedings can be incredibly challenging, costly, stressful, and upsetting for those involved. The disqualification undertaking regime - which was introduced in 2000 - gives those facing director disqualification a way to voluntarily bring the matter to an end and avoid court action.
A disqualification undertaking is where you voluntarily disqualify yourself from being a company director. Many directors prefer to offer such an undertaking as it allows them to put the matter of disqualification behind them and move on. A director disqualification undertaking can also be less costly, and less stressful than full disqualification proceedings.
However, directors mustn't feel forced to accept a disqualification undertaking. Especially as, with the proper legal support, it is often possible to persuade the Insolvency Service to withdraw court proceedings. The disqualification undertaking process has its benefits, but by voluntarily disqualifying themselves to avoid court action, many directors have accepted disqualification without the facts of their cases being accurately assessed. As a result, many director disqualifications may have been unjust and unnecessary.
What are director disqualification undertakings?
Disqualification proceedings are issued if a company director's conduct is believed to be 'unfit, or if they have failed to meet their legal responsibilities. Anyone can report a company director for unfit conduct. Proceedings are instigated by the Insolvency Service (on behalf of the Secretary of State) or by the official receiver, who is part of the Insolvency Service.
If you face director disqualification proceedings and decide to defend yourself, all the facts and circumstances of your case will be examined by the court. It will then determine whether your conduct has 'fallen below the standards of probity and competence appropriate for persons fit to be directors'.
As part of this process, the court will look at any extenuating factors (for example, whether a downturn in the economy affected your company's cash position rather than director negligence). If the court does agree that a disqualification order is required, you will usually have to pay the costs and expenses incurred by the Secretary of State (and any other parties involved).
If you receive notice that the Insolvency Service plans to start disqualification proceedings against you, a disqualification undertaking lets you voluntarily disqualify yourself and avoid court action and the threat of such costs (if circumstances allow it).
The Insolvency Act 2000 introduced Section 1A of the Company Directors Disqualification Act 1986, enabling the Secretary of State to accept such an undertaking from a director. Before this, anyone facing director disqualification had to face a formal court hearing.
A relatively simple document, the director disqualification undertaking includes a summary of why you have been deemed unfit to be a company director. It also includes how long you are prohibited from being a director and the activities you are not allowed to perform whilst the undertaking is in place.
Anyone who has an undertaking 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.
If the Secretary of State accepts a director disqualification undertaking, it has the same legal standing as a court-mandated order. As such, expert legal advice is strongly recommended before offering an undertaking.
Time frames of director disqualification
The director disqualification period can last for a maximum of 15 years. There are three different levels of director disqualification:
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, if a disqualification undertaking is offered, directors are usually issued with a slightly lower director disqualification period (up to 12 months reduction).
How are director disqualification undertakings offered?
Director Disqualification undertakings are available in two situations. Most commonly, they are entered into where director disqualification proceedings are proposed following company insolvency. They can also be agreed upon following an investigation of a company by the Secretary of State.
To begin the process, the Secretary of State will write to the person they think should be disqualified and offer them the choice of accepting a voluntary director disqualification undertaking. This is called a Section 16 letter. The letter will offer a timeframe for the voluntary director disqualification.
Supporting information will also be provided to the director to explain more about the impact of director disqualification and the various options available to them. The director will also be given a summary of why the Secretary of State is seeking their disqualification.
If you have received a Section 16 letter, it is up to you to decide whether to disqualify yourself voluntarily. Alternatively, you have the right to challenge the threatened director disqualification via formal legal proceedings. Even if you choose to accept a director disqualification undertaking, you can still try to negotiate the disqualification period offered down.
Benefits of accepting a disqualification undertaking
The benefits of a director disqualification undertaking commonly include:
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).
However, a disqualification undertaking is not suitable in all circumstances. Specialist legal advice is needed to ensure that you understand any potential negative consequences, and indeed, whether you could avoid disqualification altogether. Breaching a disqualification undertaking can have profoundly serious consequences (including fines and a prison sentence), so you must be fully informed.
*If a director disqualification undertaking is given before director disqualification proceedings formally begin, the Secretary of State will nearly always waive any claim for payment of its legal costs. After the issue of director disqualification legal proceedings, you are likely to become liable for the Secretary of State's legal costs. However, these may be waived in some circumstances to ensure an early conclusion of the case.
When does the director disqualification undertaking come into force?
Even if formal director disqualification proceedings are issued, you can remain a director of your business until either a director disqualification undertaking is accepted, or a formal director disqualification court order is made. If you decide to go to court, this process could take as long as two years.
A director disqualification undertaking can be agreed upon before or after formal legal director disqualification proceedings are issued. In some cases, a director disqualification undertaking can even be agreed during court proceedings. Although this is not usually recommended, some directors decide to opt for this route for practical reasons. For example, to give them the time they need to do something they can only do whilst they remain a director.
Once agreed, the disqualification undertaking will come into effect 21 days after it is signed by both parties (the director and the Secretary of State).
Alternatives to accepting a director disqualification undertaking
Rather than seeking a disqualification undertaking, it is possible to challenge an allegation of unfit conduct and defend your case in court. Indeed, at Summit Law, we specialise in defending director disqualification claims and have successfully persuaded the Insolvency Service to withdraw court proceedings against clients across a broad range of industries.
The bottom line is that the Insolvency Service cannot pursue a case if it does not believe it is in the public interest. Furthermore, the Secretary of State must be satisfied that the person offering the director disqualification undertaking undertook conduct that made them unfit to be concerned in managing a company. So, director disqualifications are still relatively rare.
Of the directors disqualified in the twelve months to the end of February 2020, 1,023 entered Disqualification Undertakings, with 141 of them subject to Court Orders.
Despite this, voluntary director disqualifications are almost always accepted. So, it would be best if you did not accept the inevitability of director disqualification without specialist legal advice. By scrutinising all the facts of your specific circumstances, we may be able to persuade the Insolvency Service to impose a shorter period of disqualification or drop your case altogether.
Nevertheless, we understand that many directors would rather not have to go to court – often due to concerns about costs. Others prefer a foregone conclusion rather than an uncertain outcome. We will talk you through all your options to ensure the right course of action for you.
Contact our solicitors today
Director disqualification is not inevitable. At Summit Law, we are experts in defending director disqualification claims. As well as proactively protecting our clients against disqualification proceedings, we can also ensure that any director disqualification undertakings are fair and negotiate the terms of voluntary disqualification on their behalf. You can find more information in our director disqualification guide.
With strict director disqualification time limits, you must contact us straight away even if you have only received an initial letter or phone call from the Insolvency Service.
For more information, please contact our specialist director disqualification solicitors today on 020 7467 3980.