When a company enters insolvency, attention quickly turns to the conduct of the people who ran it.
For many directors, the first sign of trouble is a letter or questionnaire from the Insolvency Service.
What happens next can affect your career, your reputation and, in some cases, your personal finances. Taking the right advice early can make a real difference to the outcome.
What is director disqualification?
Under the Company Directors Disqualification Act 1986 (“CDDA”), a court can make a disqualification order against a person whose conduct as a director makes them unfit to be concerned in the management of a company.
Alternatively, a director may offer a disqualification undertaking to the Secretary of State, which has the same effect without the need for court proceedings.
Disqualification as a director can last anywhere from two to fifteen years, depending on the severity of the conduct.
While disqualified, you cannot act as a director of a company, or be involved directly or indirectly in the promotion, formation or management of a company, without permission from the court.
This may also mean that you could be banned from being a school governor, charity trustee or member of certain professional bodies.
Details of the disqualification are also published on publicly available websites at Companies House and the Insolvency Service.
Breaching a disqualification is a criminal offence and can lead to a fine or imprisonment and can also make you personally liable for the company’s debts.
What conduct can lead to disqualification?
Common allegations include:
- continuing to trade while the company was insolvent to the detriment of creditors;
- failing to pay HMRC;
- failing to keep proper accounting records;
- failing to file accounts and returns;
- misusing company funds;
- abusing Covid-19 support schemes such as Bounce Back Loans; and
- preferring certain creditors over others.
Following the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, directors of companies that have been dissolved without a formal insolvency process can also be investigated.
How does the process work?
After a company enters liquidation or administration, the insolvency practitioner must report on the conduct of its directors to the Insolvency Service within three months of the company entering liquidation or administration. If concerns are identified, the Insolvency Service may send a questionnaire or request further information.
Following receipt of the questionnaire, if the Insolvency Service decides to pursue disqualification, it must give at least ten days’ notice of its intention to issue proceedings, often by way of a Section 16 CDDA letter setting out the allegations.
If the allegations are denied and no agreement can be reached with the Insolvency Service, then they can issue court proceedings, which must generally be brought within three years of the company’s insolvency.
Each stage offers an opportunity to respond. A well-prepared response to an early enquiry can persuade the Insolvency Service not to take further action or can narrow the allegations and reduce the length of any disqualification.
As set out above, if a director wishes to avoid court proceedings, then it may be possible to agree a voluntary undertaking with the Insolvency Service, under which the director voluntarily accepts a disqualification. Such a voluntary undertaking can help reduce the length of the disqualification period.
Compensation orders
Since 2015, the courts can also order a disqualified director to pay compensation where their conduct caused loss to one or more creditors. This means disqualification proceedings can carry a significant personal financial risk and is another reason to take advice at the earliest stage.
How Mackrell can help
Our insolvency and director disqualification team advises directors at every stage, from the first enquiry through to trial. We can help you to:
- Respond to Insolvency Service questionnaires and requests for information;
- Assist with your response to the Section 16 letter;
- Assess the strength of the allegations and the evidence against you;
- Negotiate with the Insolvency Service, including over the terms and length of any disqualification undertaking;
- Defend disqualification and compensation proceedings in court;
- Apply to the court for permission to continue acting as a director of specific companies while disqualified; and
- Advise directors of companies in financial difficulty on their duties, to reduce the risk of future claims.
- We work closely with our insolvency colleagues, so we understand how insolvency practitioners and the Insolvency Service approach these cases. We give clear, practical advice and focus on achieving the best realistic outcome for you, whether that is avoiding disqualification altogether, reducing its length, or protecting your ability to keep running your business.
Get in touch
If you have received correspondence from the Insolvency Service or are concerned about your position as a director of a struggling or insolvent company, contact our team today on 0207 240 0521 or at james.atton@mackrell.com for a confidential discussion.
