ADL are Specialist Directors Disqualification Lawyers
A liquidator or administrator will, as part of their investigation into the affairs of the company, report to the Insolvency Service if the conduct of a director is thought to be “unfit”, usually because the directors failed to keep adequate books and records or because the director traded to the detriment of the Crown and fail to pay taxes whilst continuing to pay other creditors or because there was dishonesty or impropriety or because company property removed inappropriately.
The Insolvency Service Investigations and Enforcement Services (https://www.gov.uk/government/collections/insolvency-service-investigations-and-enforcement-what-we-do-our-outcomes-and-complaints) are responsible for investigating serious financial misconduct in companies and individuals who are subject to bankruptcy or debt relief orders. They are part of the Department for Business, Energy & Industrial Strategy.
The Insolvency Service will take up the investigation and if satisfied that there is a case to answer and that it is in the public interest will issue the relevant application, in the Chancery Division of the High Court for the disqualification of the Director for a period between 2 and 15 years.
What are the stages of the Directors Disqualification process?
The investigation of Directors Disqualification and any proceedings follow a standard process and at each stage, there is usually an opportunity to stop the investigation process, force the Insolvency Service to halt court proceedings, to settle the dispute, or to prove at Court that disqualification is not appropriate.
Even if disqualified, the case does not usually end there as for many Directors there are questions of
1. Application for leave to continue acting as a director,
2. Merits of entering into a disqualification undertaking.
3. Disqualification Compensation Orders
Will the Liquidator complain about my conduct to the Insolvency Service?
If the liquidator or administrator has doubts about a Director’s conduct then the liquidator is legally bound to make a report to the Insolvency Service.
The liquidator or administrator of an insolvent company is required to file a report with the Insolvency Service within 6 months of their appointment about the conduct of directors. This requirement arises in section 7(3) of the Company Directors Disqualification Act 1986. This will be a private communication but any Director can obtain a copy of the report, although parts may be redacted under certain conditions. In limited circumstances, creditors may also be able to get copies. The liquidator or administrator will file a report saying that, in the liquidator’s opinion, either there was no improper action by the Directors, or, the directors’ conduct was “unfit” and in such cases the liquidator or administrator is required to tell the Insolvency Service what his/her concerns are. This report is called a “D1” and is commonly referred to as a “D-Report”.
A Director can infer the existence of an “unfit” D Report simply because the Insolvency Service have written to the Director. This is the stage when you need rapid and urgent legal advice from a specialist directors disqualification solicitor.
The IS will then write to the Directors for further information. This is usually accompanied by a questionnaire which asks what role was played by each Director and requests additional further details. This is only the start of the investigation, but should be treated like a police investigation as it potentially could result in a disqualification. Legal advice is essential at every stage.
The investigator at the Insolvency Service will normally ask for a formal meeting, which during lockdown will be by teleconference. Like police interviews, the investigators are trained to come across as a friendly investigator, but be under no doubt, it is the same as when a policeman says “We’re only trying to help you” …what the investigator means is “We’re only trying to help you convict yourself”.
Co-operation with IS is essential, but should only be under legal advice. Ultimately it is the “friendly investigator who met with you several months ago that is now recommending your disqualification and a disqualification compensation order. At the first sign that an investigation is underway you should obtain legal advice from solicitors who are experienced in directors disqualification.
Following the investigation, if the Insolvency Service intend to recommend to the Secretary of State for Business, Innovation and Industrial Strategy (formerly DTI and then Business, Innovation and Skills) for your disqualification to act as a company director they are required to write to you and tell you about this. This requirement arises in section 16 (1) of the Company Directors Disqualification Act and is entitled “Notice Pursuant to Section 16 of the Company Directors Disqualification Act 1986 (“CDDA”) of intention to commence proceedings to disqualify you”. This letter will tell you
- Who else the Secretary of State intends to proceed against.
(i.e. fellow directors or people acting as shadow or de facto directors).
- It will describe, in some detail, the allegations of unfit conduct relating to your time as director of the insolvent company.
- It may invite further representations from you about any of the allegations and invite you to seek a copy of the draft evidence produced against you.
- It will tell you how long the Secretary of State will suggest to the Court is appropriate for a disqualification order. (The period of ban sought and the basis o is subject to negotiation with the IS and the sooner representations can be made in this respect, the better (and they should be based upon the draft evidence on which the Insolvency Service intends to rely.).
- It will invite you enter into a disqualification undertaking, which has the same effect as a disqualification order, without the requirement for court proceedings and will usually offer a short discount for the “early plea”.
- NOTE: At this stage the investigation has nearly concluded and, although litigation is pending, not all is lost.
Company Directors Disqualification Act 1986 s16 allows the court to grant leave (permission) to any person currently disqualified as a company director to act as a Director and for the Court to do this, it is necessary for the Director to show that:
a) The company of which he/she seeks the permission needs the appointment; and
b) The public can be adequately protected if permission is given.
This is invariably by the “leave” being subject to conditions. It is often necessary to make emergency “interim application” as matters arise to ensure that a director remains compliant at all times.
Disqualification proceedings are only brought against an individual if it is in the public interest to do so. The prevailing view of the Courts is that the State must act fairly in its dealings with the individuals it intends for the Court to disqualify. The Company Directors Disqualification Act 1986 also provides for an individual to enter into a disqualification undertaking at any time prior to or before the end of proceedings.
As from October 2016, the IS can pursue a claim against a disqualified director where their conduct has been such to cause losses to one or more creditors. This is an entirely new set of powers for the State and represents significant overlapping powers with Insolvency Practitioners. Public records suggest that by far the most common basis for disqualification is the accrual of Crown debts where other creditors have been favoured.
In plain English this means that where a director has failed to pay corporate taxes or VAT whilst keeping more demanding creditors onside, which used to be common practice, then a finding of “unfit conduct” arising out of unpaid taxes could allow the IS to pursue a claim for unpaid taxes against a director personally.
Note: This is an emerging area of law which the Courts are yet to test significantly.