Advice to directors facing disqualification

Speak to us if you are a director and the Insolvency Service has threatened you with Director Disqualification proceedings. A period of disqualification, which can last up to 15 years, will have a significant impact on a director's personal and professional life. We have a proven track record of assisting directors in eliminating or reducing the risk and effects of disqualification.

Our expert team, led by Richard Wolff, with 25 years of experience in this area of law, can help you with all aspects from the initial stages of investigation of your conduct by the Insolvency Service through to advice on threatened disqualification and compensation proceedings, how to respond to the offer of an undertaking and, often in tandem with this, advising on the possibility of obtaining leave to continue to act as a director of one or more companies whilst remaining subject to a disqualification order or undertaking.

Our advice can cover:

  • Responding to correspondence from investigators at the Insolvency Service
  • Completing and returning director questionnaires
  • Making representations to the Insolvency Service on your conduct
  • Replying to Section 16 letters (which confirm an intention to issue disqualification proceedings)
  • Making representations to the Insolvency Service as to why proceedings should not be commenced
  • Advising on mitigating factors relating to any misconduct
  • Negotiating the period of disqualification where providing a disqualification undertaking is appropriate
  • Considering the position in relation to potential compensation proceedings
  • Where appropriate, acting on the defence of applications for disqualification and/or compensation orders
  • Acting on application for leave to continue to act as a director of one or more companies whilst disqualified
  • Where possible, acting for directors in seeking a reduction to existing periods of disqualification

Time really is of the essence in such cases, so get in touch with our team as soon as you can.

Get in touch with our team

Director Disqualification Proceedings

Director Disqualification Proceedings are dealt with under the Company Directors Disqualification Act.

It is not just directors registered at Companies House who may be targeted - also de-facto, and shadow directors can face proceedings.

Proceedings usually have to be commenced against a director within three years of a company entering a formal insolvency process (i.e. administration or liquidation).

Disqualification can be for a period between 2 and 15 years, depending on the severity of the director’s conduct. Proceedings have to demonstrate that the director has been involved in or allowed others to be involved in “unfit conduct”, usually arising out of a failed company. What constitutes “unfit conduct” will depend on the individual circumstances. Examples of “unfit conduct” include:

  • The director allowing the company to trade on for too long to the detriment of the company’s creditors with the knowledge that the company is insolvent.
  • The director allowing the company to run up VAT, PAYE and Corporation Tax debts.
  • The director entering into transactions at undervalue or preferences (see below).
  • The director failing to maintain, preserve or deliver up the books and records of the company to its insolvency practitioner (where losses have flowed from that failure).

This is not an exhaustive list, and other actions may constitute “unfit conduct” and leave a director at risk of being disqualified.

Being disqualified as a director precludes the disqualified director from being involved in the promotion, formation or management of another limited company during the period of disqualification (subject to leave being granted by the Court to a person to continue to act as a director of one or more companies).

To so act whilst disqualified is serious and carries both civil and criminal sanctions.

The Secretary of State for Business, Energy and Industrial Strategy, who brings the proceedings, may not seek to recover the costs of bringing the proceedings from the director if matters can be resolved prior to the issuing of any proceedings, such as by the acceptance of a disqualification undertaking.

However, if proceedings are issued and the Secretary of State is successful, the director may be liable to pay the Secretary of State’s costs.

Often the best way of ending proceedings when there is a risk of losing is to agree and sign a disqualification undertaking setting out what the director may and may not do. Such undertakings should be scrutinised carefully to ensure the director is not left open to other civil or criminal action.

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Advice to directors facing personal claims from insolvency office-holders or creditors

We have in-depth experience of acting for directors in relation to various types of claims that they may face, including wrongful trading, fraudulent trading, misfeasance and breach of duty, transactions at undervalue, preferences and the payment of unlawful dividends.

How we can help

Our advice can cover:

  • Responding to correspondence from insolvency office-holders and their solicitors alleging claims against directors and threatening to bring proceedings in court
  • Completing and returning director questionnaires forwarded by office-holders
  • Negotiating settlements of claims where there is a risk of losing in court proceedings
  • Engaging in mediation or other forms of alternative dispute resolution
  • Defending court proceedings brought by office-holders in relation to claims
  • Considering complaints against insolvency office-holders in relation to their conduct of an insolvency process whether a director’s position is unduly prejudiced and/or there is loss to creditors.

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Types of claims against directors

We set out below for information the main grounds for claims that may be brought against directors of insolvent companies in relation to which legal advice and assistance may be required.

Wrongful Trading

What is wrongful trading?

If you are a director of a company and are worried that your company is, or is likely to become, insolvent, you must consider whether to stop trading straightaway. If during the course of an insolvent winding up or administration of a company, it appears that a director knew or ought to have known that there was no reasonable prospect of avoiding liquidation or administration, then the director can be ordered by the court to make a contribution to the company’s assets. Also, any director found to be liable for wrongful trading may face director disqualification proceedings.

The court will not make an order for wrongful trading if, knowing there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration, the director took every step possible to try and minimise any potential losses to the company’s creditors.

Any liquidator or administrator seeking an order from the court in respect of wrongful trading does not have to prove dishonesty on the part of a director. However, they will need to produce evidence to the court not only of the wrongful trading itself but also that it resulted in a loss to the creditors that would not otherwise have occurred.

Avoiding the risks of wrongful trading

There are a variety of ways in which directors can avoid being liable for wrongful trading, both in terms of their ongoing conduct as a director of a company facing financial difficulty and in seeking independent professional advice from a solicitor and (when relevant) a licensed insolvency practitioner on their company’s procedure and the best options going forwards.

Given the above, we would recommend that you contact us as soon as possible to improve your prospects of avoiding the risk of a wrongful trading claim being brought against you should your company enter a formal insolvency process.

Fraudulent Trading

What is fraudulent trading?

If in the course of a winding up or administration of a company, it becomes clear that a person (including directors) has been involved in any attempt to try to defraud creditors, then a liquidator or administrator can seek an order from the court that the relevant person makes a contribution towards the company’s assets. As well to the civil courts being able to make orders, fraudulent trading is also a criminal offence under the Companies Act 2006 and directors who are guilty of fraudulent trading can face disqualification as a director.

Proving fraudulent trading

The liquidator or administrator has to provide evidence to the court that a director or other relevant person has acted deliberately to avoid payment of company liabilities. The burden of proof that the liquidator or administrator has to satisfy is high, and, as a result, fraudulent trading claims are less common than other types of claims against directors.

Misfeasance

What is misfeasance?

The definition of misfeasance is contained in the Insolvency Act 1986. Misfeasance encompasses the misapplication and/or retention of property (including money) belonging to a company, becoming accountable for property belonging to the company and breach of fiduciary duty relating to the company.

Breach of duty is an essential element in bringing a misfeasance claim. An action for misfeasance is only capable of being brought where an officer of a company breaches a duty that he/she owes in their capacity as an officer. As an indication, the following examples have been found to be a breach of duty for the purpose of proving misfeasance:

  • A director causing a company not to pay VAT;
  • Directors making secret profits;
  • Directors purchasing a property that was then sold onto a company; and
  • Directors granting preferences to creditors.

Who can be sued for misfeasance?

Where a company has gone into liquidation, then a misfeasance claim can be brought under section 212 of the Insolvency Act 1986 against an officer or former officer of the company in liquidation (which definition can include, as well as a director who is or was registered at Companies House, a de facto or shadow director).  It is worth noting that such a claim can also be brought against a person who has been involved in the promotion, formation or management of the company.

Who can bring a misfeasance claim?

Where a company is in liquidation, a misfeasance claim can be brought by a liquidator of the company, a creditor of the company, a contributory to the company’s capital (as long as leave from the court is obtained) or the Official Receiver. An administrator cannot bring a misfeasance claim where a company is in liquidation, but administrators can take action in the insolvent company’s name.

Court Remedies

If the court finds that a person has been misfeasant or has breached their duty (fiduciary or otherwise) to the company, the court may order him/her to:

  • Repay, restore or account for any misappropriated money or property to the company with interest; or
  • Compensate the company for any misfeasance or breach of duty by contributing to the insolvent company’s assets.

Transactions at an Undervalue (TuVs)

What is a TuV?

An administrator or a liquidator of a company can apply to the court to set aside any TuV.

A TuV is where:

  • An insolvent company made a gift or otherwise entered into a transaction where the company received no consideration;
  • An insolvent company entered into a transaction where the consideration payable is significantly less than the true value of the transaction;
  • The relevant transaction was entered into two years before the onset of insolvency (i.e. entering into administration or liquidation); and
  • The company was unable to pay its debts at the time the transaction was entered into or became unable to pay its debts as a result of the transaction.

Defending a TuV Claim

The court will not make an order to set aside a TuV if it is satisfied that both:

  • The company entered into the transaction in good faith and for the purpose of carrying on its business; and
  • At the time it did so, there were reasonable grounds for believing that the transaction would benefit the company.

Court Orders that may be made

 If a TuV claim is successful, there are a number of orders the court may make. In particular, the court may:

  • Require any property transferred as part of the transaction be re-vested in the company;
  • Require proceeds of sale from a property to be re-vested in the company;
  • Release or discharge any security given by the company;
  • Require any person who received a benefit from the insolvent company to pay such sums to the administrator or liquidator of the company;
  • Require a person whose obligations to the insolvent company were released or discharged to provide new or revived obligations;
  • Require security to be provided relating to the discharge of any obligation; or
  • Provide that a person whose property is ordered to be vested in the company or on whom obligations are imposed to be allowed to prove a claim against the insolvent company.

Preferences

What is a preference?

A company gives a preference to a person if each of the following applies:

  • The person is one of the company’s creditors or a surety or a guarantor for any of the company’s debts or other liabilities;
  • The company does something which has the effect of putting that person into a position which is better than the position the person would be in in the event of the company going into insolvent liquidation;
  • The company was influenced in deciding to give the preference by a desire to prefer the party. This is a subjective test, not an objective one. It is necessary to establish that the company positively wished to put the party in a better position. ;
  • The preference was made at least six months before the onset of the company’s insolvency (this time limit is increased to 2 years if the preference is made to a connected person (e.g. a director, a shadow director or a person who has control over the company’s decision-makers)); and
  • The company was unable to pay its debts at the time of the transaction or became unable to pay its debts as a result of the transaction.

Examples of preferences include:

  • Paying an unsecured creditor ahead of others;
  • Granting security to a previously unsecured creditor;
  • Allowing a supplier to change its terms and conditions to include a retention of title clause; and
  • Repaying a director’s loan account or reducing a company debt guaranteed by one of the directors.

Court Orders that may be made

Where a preference is established, the court may make any order it thinks fit for restoring the position to one where the company had never given the preference. In particular, the court may:

  • Require any property transferred as part of the transaction be re-vested in the company;
  • Require proceeds of sale from a property to be re-vested in the company;
  • Release or discharge any security given by the company;
  • Require any person who received a benefit from the insolvent company to pay such sums to the administrator or liquidator of the company;
  • Require a person whose obligations to the insolvent company were released or discharged to provide new or revived obligations;
  • Require security to be provided relating to the discharge of any obligation; or
  • Provide that a person whose property is ordered to be vested in the company or on whom obligations are imposed be allowed to prove a claim against the insolvent company.

Unlawful Dividends

What is an unlawful dividend?

An unlawful dividend is a distribution to shareholders that either contravenes common law or Part 23 of the Companies Act 2006. A distribution may contravene common law if it is made out of capital. A distribution may contravene Part 23 of the CA 2006 if a dividend is declared in excess of the company’s distributable profits or if a dividend is justified by a public company’s interim accounts which have not been filed.

If a distribution is in excess of distributable profits, the distribution is unlawful to the extent of the deficiency in the available profits, not in its entirety.

Examples of unlawful dividends include where::

  • Interim accounts are not prepared, and the last annual accounts show insufficient distributable reserves;
  • A parent company declares and pays a distribution when the requisite profits have not been received and recorded by way of proper dividends from its subsidiaries, even when subsidiaries had sufficient profits to pass onto the parent company;
  • A public limited company fails to file interim accounts that have been prepared in respect of an interim dividend with the registrar of companies;
  • A subsidiary carries out a capital reduction and prepares interim accounts which show a positive reserve and distributes dividends to the parent company, only for it to transpire that not all of the legal procedures relating to the capital reduction were carried out, and therefore the capital reduction is invalid; or
  • A parent company receives a dividend from its subsidiary and then makes a distribution to its shareholders. The dividend, however, causes an impairment in the subsidiary’s value which is not reflected in the parent company’s accounts and the loss arising wipes out some of the distributable reserves in the parent, meaning there are insufficient reserves to cover the dividend paid.

Liability of shareholders and directors

A shareholder who knows or has reasonable grounds to believe that distribution (or part of it) contravenes the rules on distribution of dividends is liable to repay the dividend. However, where it cannot be shown that a shareholder knew or had reasonable grounds to believe the dividend payment was unlawful, the shareholder will not be liable to repay, and the directors who recommended the unlawful distribution may be liable to the company instead.

A director who authorises the payment of an unlawful distribution may be in breach of statutory and common law duties (e.g. duty to exercise reasonable care, skill and diligence) and may be personally liable to repay the company even if they are not a shareholder.

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Funding

Our Dispute Resolution Solicitors are happy to discuss your situation in a no-obligation and free consultation by telephone.

We also offer different funding arrangements to suit your individual needs. Conditional fee agreements or “No win, no fee” arrangements may be available, as may insurance policies or third-party funding.

At Myerson, our litigation funding team will provide guidance in handling the financial risk that comes with litigation and directing any of those costs off your credit sheet.

We understand the costs that come with litigation, which is why we act with integrity. We will only provide funding as an option if it is in your best interests. We can advise you on whether your claim is suitable for litigation funding. 

Find out more about the different litigation funding options that may be available to you.

 

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Meet Our Specialists

Home-grown or recruited from national, regional or City firms. Our specialists are experts in their fields and respected by their peers.

Richard Wolff

Richard Wolff

Richard is a Partner and Head of our Insolvency and Restructuring Team

Jack Ramsden

Jack Ramsden

Jack is an Associate in our Insolvency and Restructuring Team

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