The undoubted benefits brought in by the legislation under which directors, who it is felt by the Disqualification Unit at Department of Business Enterprise are unfit as directors, can undertake not to act as a director for a period of time has become a double-edged sword.
The Company Directors Disqualification Act (1986) provides that an Insolvency Practitioner (IP) appointed to an insolvent company must carry out a review of the director’s conduct to assess whether or not the director is fitted to hold the post of a director.
Regard is taken of a number of issues by the IP but includes whether the directors have traded on the Company whilst it was insolvent or whether the directors failed to keep proper books of accounts or made misrepresentations to customers or misapplied the company’s monies etc.
It was the case that if it was felt that the director was unfit as a director then proceedings would be commenced by the Disqualification Unit against the director through the Courts for a Disqualification Order. Those proceedings would continue until either the final hearing of the disqualification proceedings or an agreed negotiated settlement was achieved (known as “a Carecraft Settlement”). This procedure was not only time consuming but also expensive as the director would have to pay the Disqualification Unit’s legal costs if an Order was made. Consequently to save time and costs, the concept of a director giving an undertaking not to act as a director was introduced and now that procedure forms the bedrock of most disqualification proceedings today.
In appropriate circumstances the Disqualification Unit will contact the director within two years of the insolvency of the company and explain why they feel the director is unfitted to be a director and offer draft undertakings to the director under which he agrees not to act as a director for a specified period of time. Attached to the draft undertakings will be an agreed statement of facts, i.e. an admission by the director as to what his unfit conduct actually was.
To avoid costs, time and expense, the directors are naturally tempted to accept the undertaking rather than negotiate or fight the case. However directors must stop and think before giving that undertaking.
Acceptance of the undertaking is an important step. To breach the undertaking and continue to act as a director carries both criminal and civil penalties. The criminal penalty means that the guilty director can end up in prison.
The civil penalty is that the guilty director must contribute to the debts of the insolvent company. It is also important to remember that the definition of the director is not limited to an individual who is registered as such at Companies House. It includes, amongst other things, “shadow directors” that is individuals who are not registered as directors but whom other directors regularly receive instructions from; it also includes “nominee directors” i.e. directors in name only.
It is also important to remember that the director will be agreeing with the Disqualification Unit’s agreed statement of facts attached to the undertaking relating to the director’s alleged unfit behaviour. The director may find himself on the end of litigation proceedings brought by a Liquidator or Administrator for e.g. wrongful trading. The director, in signing the agreed statement of facts and the undertaking has admitted that alleged guilty conduct. Although the agreed statement of facts in the undertaking is not admissible in any court proceedings, the Administrator or Liquidator will be reassured of the strength of his/her case against the director by the director’s acceptance of the statement of facts and undertaking.
There is a safety valve and applications can be made to the Courts by directors for permission to act as a director notwithstanding having either a Disqualification Undertaking or a Disqualification Order against them. Those applications have been successful as long as the Courts are convinced that the public is protected.
The three essential points for a director to remember when faced with the threat of disqualification proceedings by the Disqualification Unit are:
- Review the evidence put forward by the Disqualification Unit concerning the actions as that evidence may be factually incorrect.
- Consider the effect upon your own personal position if a Disqualification Undertaking is given by you, not only now but also in the future.
- Take advice immediately on your options and the strength of your position with a view to negotiating a shorter period or defending your position entirely.