Andrew Frake
Associate, Dispute Resolution

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FAQs

Directors under attack

Contact

Andrew Frake
Associate, Dispute Resolution

andrew.frake@asb-law.com

FAQs


How and why does DBIS become involved?
If your company goes into some form of insolvency, the Insolvency Practitioner has a duty to submit a 'D' form which will include his/her comments on your role as a director in the insolvency of the company. That said, DBIS does not necessarily investigate each insolvency situation, or apply for disqualification every time.

How do you know whether a disqualification order will be made?
The test is whether your conduct as a director falls below the standards of probity and competence required by the court thereby making you unfit to manage a company.

The court’s approach to this question consists of a combination of fact and law. It will make a finding of fact that there was unfitness. It will then have to decide whether your conduct fell below the standards required of directors, by law.

In reaching this decision, the court will take into account factors including:

  • misuse of company funds
  • the extent to which you were responsible for causing the company to become insolvent  
  • whether you allowed the company to enter into transactions to defraud its creditors  
  • the extent to which you were responsible for a failure to keep full and proper accounting records and/or submit annual returns/file accounts on time 
  • trading to the detriment of the Crown (effectively using monies owed to the Crown in respect of PAYE, NIC and VAT as working capital) 
  • trading to the detriment of the body of creditors as a whole 
  • failure to co-operate with the liquidator/deliver up the company’s property

How long is the period of disqualification likely to be?


Period of Disqualification Example of behaviour
Not so serious 3-5 years Allowing co-director to act whilst disqualified, causing or allowing payments to be made to  family member/co-director when you knew or ought to have known company was insolvent
More serious 6-10 years Failure to pay corporation tax/PAYE/NIC/VAT whilst declaring dividends and repaying loans despite existence of these HMRC liabilities/trading to the detriment of the Crown
Very serious 10-15 years Acting as a director whilst disqualified or whilst bankrupt

Are there any defences a director can rely on?
Yes. However, the first thing to mention is that you should seek legal advice at the first sign of trouble. Don’t ignore the warning signs: there is much that can be done to either defend proceedings or, at the very least, to try and mitigate the disqualification period.

This can often be crucial where the director is a member of a professional body and may potentially risk disciplinary action by that body.

Mitigating factors might include:

  • you having suffered personal financial or other loss emphasising, if appropriate, the absence of dishonesty (ensuring that a disqualification of 10-15 years is unlikely to be ordered)
  • delay in bringing the disqualification proceedings 
  • reliance on the professional advice of others 
  • your youth and inexperience 
  • compromised ability to perform your duties due to other commitments, such as caring for a terminally ill relative or domestic pressure 
  • co-operating with the office-holder and those involved in disqualification proceedings 
  • admitting responsibility

This is where asb’s experience really comes into its own: our understanding of the Insolvency Service and how it works enhances our ability to better negotiate on your behalf.

Is there any way to short circuit the procedure?
Yes. If, on receipt of the Insolvency Service’s notification of DBIS’s intention to bring disqualification proceedings or at any stage before trial, you do not wish to contest the proceedings, you can offer to give an Undertaking not to act as a director.

Be warned that the costs become more and more onerous the longer the proceedings are ongoing and the closer you get to trial.

What happens once the Order is made?
If you have no need to act as a director or be concerned in the management of a company, then nothing happens.

However, if you have a need to act as a director of a specific company, then we can assist in the preparation of an application for permission to act under Section 17 of the Company Directors Disqualification Act 1986.

We have extensive experience of these types of applications from DBIS’s perspective, and so we are very well placed to prepare them from your perspective as a defendant director. And, Tania Clench, who manages the team, is a recognised authority on applications for permission to act and her contribution in this field is acknowledged in Sealy & Milman, the indispensable text for insolvency professionals.

Andrew Frake, Associate, Dispute ResolutionTo start a conversation on how we can help you please contact Andrew Frake, Associate, Dispute Resolution.

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