When does a disqualification undertaking take effect?

Ordinarily a Disqualification Undertaking takes effect 21 days after the date it has been accepted by the Secretary of State.

Can the period of undertaking offered be reduced downwards?

It is always possible (and sensible) to try and negotiate the period offered by the Secretary of State downwards.

The best way to negotiate a period downwards is by producing a detailed written response backed by documentary evidence countering the allegations made. If this can be produced, then there is the opportunity to negotiate the period of disqualification downwards – although this is not always guaranteed.

How are Director Disqualification Undertakings offered?

Ordinarily, the Secretary of State (or its lawyers) will write to an individual whom they believe should be disqualified giving them the choice of accepting a voluntary undertaking to be disqualified instead of dealing with the matter by issuing formal legal proceedings.

These letters are commonly known as Section 16 letters as they are written pursuant to Section 16 of the Company Director Disqualification Act 1986. A section 16 letter will summarise the nature of the allegations against an individual and then offer a period of voluntary disqualification (ranging between 2-15 years for Section 6 disqualification claims) which can be accepted by the individual in lieu of formal legal proceedings.

A section 16 letter is normally accompanied by various information booklets on the effect of disqualification and outlining the various procedures and options open to that individual if they wish to continue acting as a director despite the disqualification undertaking. This is most commonly referred to as seeking leave under Section 17 of the Company Director Disqualification Act 1986.

What Conditions need to be satisfied before the Secretary of State can accept a Director Disqualification Undertaking?

There are 2 main conditions:-

1. The Secretary of State must be satisfied that the person offering the undertaking is or has been a director of a company which has at any time become insolvent and that the conduct of that person as director of that company makes him unfit to be concerned in the management of a company.

2. Secondly the Secretary of State must believe that it is in the “public interest” that he should accept a Disqualification Undertaking instead of applying or proceeding with an application for a formal Disqualification Order.

In reality, the Secretary of State will nearly always accept a voluntary undertaking if one is offered, as it is in the public interest to limit the risk of court proceedings, the legal costs involved and the cost-benefit of issuing a disqualification claim. However in some circumstances, the Secretary of State may consider it is in the public interest for the individual to be disqualified in open court proceedings. This is usually in circumstances where there is a high profile matter or some other public interest reason for the claim to be dealt with at court (which is highly unusual).

Periods of Disqualification

The maximum period which a director can be disqualified by way of undertaking is 15 years. The minimum period under Section 6 is 2 years (there is no minimum period under section 8).

With regard to Section 6 disqualifications, there are 3 distinct “brackets” of disqualification within this range.

• 2-5 years – this is known as the “lower bracket”

• 6-10 years – this is known as the “middle bracket”

• 11-15 years – this is known as the “higher bracket”

Subject to the “gravity” of the offences giving rise to the allegations of unfitness, an individual will face disqualification in one of those 3 categories.

If a person who is already subject to an undertaking or formal court imposed Disqualification Order then agrees to a further voluntary undertaking for a second “offence”, the Order shall run concurrently (Section 1A(3) of the Company Director Disqualification Act 1986).

Disqualification Undertakings – the present law

The present law is enshrined in Section 1A(1) of the Company Director Disqualification Act 1986.

Section 1A(1) enables a person to give an undertaking meaning that that he/she:

(a) will not 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 (in each case) he has permission of the Court, and

(b) will not act as an insolvency practitioner.

Disqualification undertakings are only available where disqualification proceedings are proposed following the insolvency of a company (Section 6 of the Company Directors Disqualification Act 1986) or following an investigation of a company by the Secretary of State (Section 8 of the Company Directors Disqualification Act 1986). Disqualification undertakings are more commonly entered into in the first situation.

The Background to the Disqualification Undertaking Regime

Disqualification Undertakings came into force on 2 April 2001 as part of the Insolvency Act 2000.

Prior to this time a person facing disqualification could not be disqualified without there being a formal Court hearing. This was even true where a person was prepared to consent to being disqualified voluntarily. The Company Director Disqualification Act 1986 simply did not cater for any form of voluntary disqualification.

This made it both expensive and time consuming for people who were prepared to accept a disqualification on a voluntary basis – either because they were unwilling or unable to contest the legal proceedings which they faced.

In recognition of this problem, a new streamlined method for enabling a person to agree to a voluntary disqualification was introduced in 2001.

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Andyfwj

Partner at Francis Wilks and Jones

Andy Wilks is the head of commercial litigation at Francis Wilks & Jones LLP. Andy completed his articles at Davies Arnold Cooper solicitors and then joined niche receivables finance firm, Wildes. Before setting up Francis Wilks and Jones LLP, he also spent a year at city firm, Hammond Suddards Edge. Andy’s range of expertise includes the following: Undertaking many thousands of debt recovery cases for clients, from lower value claims to high value complex contractual disputes. Undertaking high value fraud cases on behalf of clients, often requiring the need for urgent injunctive relief at court and the obtaining of relevant freeing orders and ancillary disclosure orders. Andy is currently running a $20m claim for an invoice finance and trade finance client involving allegations of fraud. Conducting all manner of director disqualification claims, both pre and post issue. Andy is one of the country’s leading lawyers in this specialist area and has built up a highly specialised director disqualification team at FWJ over the last decade. Undertaking numerous types of insolvency litigation claims, including preference claims both for and against directors and advising directors generally on their fiduciary duties.