How does the disqualification undertakings procedure work?
Prior to the introduction of the Disqualification Undertaking regime in 2000, if you faced the potential for Director Disqualification proceedings there was no up front ability, for the director, to bring the matter to an end voluntarily. The Director had to wait for the Insolvency Service to issue the proceedings – usually through solicitors – before they could then negotiate a settlement of the proceedings through what was known as the “Carecraft” procedure.
The only certainty was that, with solicitors instructed on both sides, the costs would be higher than they have been – on an average case – following the introduction of the Disqualification Undertaking procedure.
The Disqualification Undertaking procedure, introduced as a result of the Insolvency Act 2000, was seen as a way of dealing with this issue and making the costs of the proceedings more reasonable. The Insolvency Act 2000 introduced Section 1A of the Company Directors Disqualification Act 1986, this new section allowed for the Secretary of State, if the circumstances allowed it, to agree to an undertaking from a director for an agreed period that:
“ 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 leave of a court”
The Section also provided for the Disqualification Undertaking to come into effect some 21 days after it was signed by both parties – the director and the Secretary of State – with the date to run from when it is signed on behalf of the Secretary of State.
The other advantage is that you will normally get a modest reduction of up to 12 months to the period of disqualification that they will accept from you if you are prepared to sign up for a Disqualification Undertaking.
Accepting a Disqualification Undertaking – the benefits
If the Insolvency Service is considering proceedings then the initial part of the process will remain the same. There will still be a Section 16 letter sent by the Insolvency Service which, will set out the allegations that the director may well face in the proposed proceedings, and in addition offer you as the director an opportunity to enter into a Disqualification Undertaking.
As with the standard Section 16 letters, if you decide to not provide a Disqualification Undertaking to the Secretary of State then it may be that proceedings will be issued at the court.
It is worthwhile making the point that whether or not you should choose to offer a Director Disqualification Undertaking, when you have received the Section 16 letter, the option of providing a Disqualification Undertaking to the Secretary of State will always be there.
The easiest and most straightforward benefit of the giving of a Disqualification Undertaking is that it brings the matter to an immediate conclusion which means no further costs for either party which, if you were to consider the impact of the costs of legal proceedings, is a substantial saving for the director and, indeed, the Secretary of State.
Disqualification Undertaking – Risks and Consequences
It is advised, in order that the entire circumstances can be reviewed and appropriate advice given, that legal advice is taken by the Director as soon as possible following the initial contact with the Insolvency Service. A failure, by you as a director, to take advice can lead to a Director Disqualification Undertaking being signed without advice that can lead to a large number of consequences for the unadvised director.
If you ultimately choose to give a Disqualification Undertaking either with the benefit of advice or not, it should be remembered that it will be registered on a public register and there may be negative consequences for any current business interest, even if you are only a shareholder.
Additionally, you should ensure that you are compliant with a Disqualification Undertaking – as if such an undertaking is breached then the consequences are considerably more serious and could lead to a prison sentence.
If you choose to enter into a Disqualification Undertaking with the Secretary of State for Business Energy and Industrial Strategy then this will not prevent you, the director, from running a business as long as that business does not have a limited liability in relation to it, or from acting as an employee within the business. The issue, once a Disqualification Undertaking is signed, is in relation to being involved in the management of a business.
This is, unfortunately, made more complicated by the fact that there is very little definition in the term used within the undertaking document “acting directly or indirectly in the management of a company” is extremely vague and, in our opinion, deliberately so in order to make it as difficult as possible to stay within the definition. It does, however, remain possible to be involved within a company but it is very important that your role is examined and considered very carefully to ensure that is does not breach the undertaking. We have the expertise to provide you with the advice you need to ensure that you are forewarned in your ability to move forward.
It is also important that the title of “director” is not the only badge that needs to be removed, it is important that your actions, involvement in decision making processes, with the bank, in negotiating contracts and in your interactions with other staff members to not indicate a “management” involvement. The reason we refer to the “director” label is because it is very possible to be found to have breached the rules as a “shadow director” so someone acting as, in effect a director, without the official title.
Given the above, the need to take advice is huge if only so that you can understand your various options, in relation to a Disqualification Undertaking and not breaching the same. It is worth drawing your attention to a follow on solution to the problem of potentially breaching the Disqualification Undertaking if you feel that you need to be further involved. Please see our pages on the making of an application under Section 17 of the Company Directors Disqualification Act. This application, if successful will allow you to act as a director of the company you need to, subject to certain qualifying criteria and conditions, throughout your disqualification.
One of the changes to the Director Disqualification regime and which has had potentially the biggest and perhaps most significant impact is the introduction of Compensation orders. Following this introduction, if the director gives a Disqualification Undertaking and it is accepted by the Secretary of State, then there is an immediate liability for the director to compensate the company for all of the losses which his actions, he has agreed by signing the Disqualification Undertaking, have caused.
This is the position unless the Insolvency Service decides not to look to the court for a Compensation Order against the director.
Ordinarily , the Insolvency Service will choose to notify you, in writing, in the Section 16 letter whether it their intention at that time to consider a Compensation Order.