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Secretary of State now exempt from providing draft evidence in Director Disqualification cases?

Secretary of State now exempt from providing draft evidence in Director Disqualification cases?

This is a worrying trend for directors threatened with disqualification

I may have missed it so I apologise in advance, but can somebody please point me in the direction of the provision or rule that apparently exempts the Secretary of State for Business, Energy and Industrial Strategy (SoS) in Director Disqualification proceedings from having to provide draft evidence to a targeted director, even in circumstances where the SOS has previously offered in correspondence to provide draft evidence to the director and his/her advisors? It is a recent trend we have come across – and a worrying one.

Until recently a request for the draft evidence was acted on – no longer, it seems

Here At NDP, we are seeing a number of cases where, as part of its section 16 pre-action letter to the director, an offer is made by the SoS to provide the director with the draft evidence that it is intended to rely upon against him if Director Disqualification proceedings have to be commenced.

Back in the day, a routine request for sight of that draft evidence and the exhibit bundle behind it would be met by the provision of those documents.

Worryingly, that appears to be no longer the case, depending on which member of the Insolvency Service team you find yourself corresponding with, on behalf of the director.

The situation varies from case to case

The position appears to vary from case to case. I have two cases on my desk at this time.

In the first case, my request for the draft evidence has (finally) been met with an agreement to provide the draft evidence so that the defendant director can know, understand and be advised about the precise wording of the case that he has been asked to respond to.

That does not seem to be too much to ask, does it?

However, in the second case that is on my desk this morning, the request for the draft evidence, as offered by the SoS, has been met by the following statement, which refuses to supply the requested evidence:

“……I have provided the draft exhibits in support of the allegation for your client’s consideration and whilst my turn of phrase that the allegation against your client is a “straightforward one” was perhaps not the most appropriate, the emphasis was that the exhibits themselves are comprehensive, clear and easy to follow in respect of the allegation and accordingly your client should be able to consider his position based on this information alone (i.e. without the draft evidence).”

The Director should be able to see, and be advised on, the case against him/her

Call me old-fashioned, but when the state is threatening to attack the ability of the director to earn a living and inflict huge reputational damage on the director, the director should be able to see and be advised on the precise case that he is being asked to respond to. Just as in any other litigation claim.

That is perhaps especially so when the Secretary of State offers to provide that evidence but then, for unspecified reasons (that may, of course, include an attempt at cost saving) refuses to provide that evidence.

We believe such actions will leave the SoS wide open to a judicial review

It seems to us that in such a case where evidence is offered but then the SoS declines to provide it, The Secretary of State is leaving himself wide open to a successful challenge by judicial review Application to the Court on application by an aggrieved director.

We have raised this issue with the Secretary of State, highlighting the inconsistent approach of the SoS to this matter. We will report on the response once received.  In the meantime, we would be interested to hear the experience of other practitioners that may have encountered this problem.

Contact us or call us on 0121 200 7040. I would be very interested to hear from you.

Neil Davies (Partner)

Directors Must Remain Vigilant Despite Wrongful Trading Suspension

Directors Must Remain Vigilant Despite Wrongful Trading Suspension

Covid-19 – Wrongful Trading Rules Suspended. But, Our Insolvency Solicitors Advise that Directors of Failing Companies Still Need to Tread Very Carefully

The message we want Directors to take from this article is that Directors of failing or troubled limited companies still need to tread very carefully, even though the Wrongful Trading Rules have been temporarily suspended due to Covid-19. Our Insolvency Solicitors explain why Director Disqualification investigations and Misfeasance Claims remain a significant risk for Directors of failing companies.

What is Wrongful Trading?

Once a Director of a company concludes (or should have concluded) that there is no reasonable prospect of the company avoiding an insolvent liquidation or administration, they have a duty to take every step which a reasonably diligent person would take to minimise potential loss to the company’s creditors.

If, after the company has gone into insolvent administration or liquidation, it appears to the Court that a Director has failed to comply with this duty, the Court can order the Director to make such contribution to the company’s assets as it thinks proper. In other words, personal liability for the director can be the result. This usually happens on application to the Court by the Liquidator of the company.

Our Insolvency Solicitors Explain What has Changed, and Why

In response to the COVID-19 Pandemic, the Business Secretary announced, on 28th March, the temporary suspension of the wrongful trading provisions for three months with retrospective effect beginning on 1st March 2020. This measure has been taken to help remove the threat to Directors of incurring personal liability for company debts, during the Pandemic. It is a step intended to incentivise businesses not to fail and to give some – very limited -protection to Directors.

These measures may (our emphasis added) assist company Directors in making business decisions to continue trading – and potentially incurring creditor liabilities – without the imminent threat of personal liability in respect of the wrongful trading rules, should a company become insolvent and fall into a formal insolvency process.

What are the Likely Consequences of the Suspension?

In our view, the changes will affect very little. Further details are awaited on this, but the measures being implemented will form part of a new regime that looks to assist struggling businesses through a difficult period. The Government’s stated objective remains to assist businesses and ensuring they are provided with the necessary time and space to ride out the wave that is the COVID-19 Pandemic.

The Business Secretary has reiterated that ‘all of the other checks and balances that help directors fulfil their duties properly will remain in force’. This is of course subject to change.

What Can and Should the Well-Advised Director Do?

On first read, such changes appear to provide welcome news to many Directors whose companies are suffering right now. However, it is important that Directors do not become complacent bearing in mind the plethora of other statutory obligations that they are subject to, with the obligations they are still under. The priority should remain the mitigation of risk of breaching any obligation and obtaining restructuring advice now, during the storm.

Directors should continue to have in mind, in particular, the following areas of risk:

  • Director Disqualification (‘DD’) under the Company Directors Disqualification Act 1986 (‘CDDA’). If post liquidation, the Director is deemed to have engaged in Unfit Conduct, which is very widely interpreted, the Director is likely to face an expensive and time consuming DD investigation by the Insolvency Service. Examples of Unfit Conduct include:
      • Non-payment of Crown debt.
      • Trading the company for too long.
      • Not keeping or delivering up the company books or records.
  • Misfeasance claims against them and their assets personally, by Liquidators, alleging the mis-application or misuse of company money or assets, under section 212 of the Insolvency Act 1986.

Advice from our Insolvency Solicitors

Here at NDP, our 9 Insolvency Law Solicitors and the Team behind them are well placed to advise our clients and contacts, free of charge in the first instance.

Licensed Insolvency Practitioner (‘LIP’) Advice

Due to our extensive LIP contacts, we can arrange immediate consultations for you and your clients, with the right LIP for your business, usually on a free of charge basis in the first instance.  Choosing the ‘right’ LIP for you and your business, is critically important.

Why Bother Getting that Legal or ‘LIP’ Advice?

Apart from the obvious benefit of talking to experienced professionals, taking advice now can be a useful ‘insurance policy’ for the Director, if he/she follows the advice given, but is then subsequently challenged by a LIP.  What’s to lose?  There is much to gain in taking that advice at an early stage.

Free Initial Advice from our Insolvency Solicitors

If you are a Director reading this and are concerned about your business or any future liability, or would like to discuss anything that is on your mind then please do not hesitate to contact a member of the Team. Click here to see our full list of contact numbers during the current Covid-19 lockdown.

We have significant experience in advising and defending directors facing Director Disqualification and/or misfeasance claims. Please click here to see some of our testimonials.

£560,000 Director Disqualification Compensation Order

£560,000 Director Disqualification Compensation Order

Stop press November 2019: Directors be Very Afraid. The First Director Disqualification Compensation Order is made – £560,000

The Secretary of State for Business, Energy and Industrial Strategy (SOS) has had the power to not only seek to disqualify a director but also within the same proceedings to seek compensation orders against that director, since 1 October 2015, under Section 15A and 15B of the Company Directors  Disqualification Act 1986 (the CDDA). 4 years later and the first director disqualification compensation order has been made for £560,000 in addition to a 15 year disqualification period. In this article we detail the case in which this happened and explain why directors should be very afraid as a result.

The Details of the Director Disqualification Compensation Order Case

In a judgement dated 1 November 2019 , in the case of Noble Vintners Limited (‘Noble’), ICCJ Judge Prentis having disqualified Kevin Eagling as a director for 15 years (the maximum disqualification period), has also ordered Mr Eagling to pay the eye watering sum of £559,484 in compensation to:

  • The SOS, for 28 named creditors of Noble in the sum of £460,067; and
  • The liquidator of Noble, as a contribution to its assets in the sum of £ 99,416.

This was on any analysis an extreme case of Director misconduct. It is worth noting on the specific facts of this case, that the total compensatory award matched in amount, the amount of income that Noble had received from its customers and that Mr Eagling had then caused Noble to pay to a company controlled by him, without any commercial justification for so doing.

What Evidential Threshold Must be met To Make a Director Disqualification Compensation Order?

The court has to be satisfied that the conduct of the Director:

‘… has caused loss to one or more creditors of an insolvent company of which the individual has been a director’.

How much compensation should be ordered by the court?

The court must have regard to:

  • The amount of the loss caused.
  • The nature of the misconduct
  • What other financial contribution the offending Director has made in recompense for his /her conduct (presumably to somebody such as a liquidator of the insolvent company).

Our Director Disqualification Solicitors Comment

 Our immediate comments on this development, from the perspective of the Director, are that:

  1. Competing financial claims from the SOS and the company liquidator.

We often see claims against directors proceeding at the same time, from the SOS (seeking disqualification) and from the liquidator seeking financial recovery, arising out of the same set of facts. We can easily imagine a situation (now that the SOS can seek financial compensation orders) where those 2 competing financial claims against the Director are in conflict. That situation will need to be carefully managed and negotiated by the Director’s solicitors.

  1. Reluctance to give Director Disqualification undertakings.

Directors may now be far more reluctant to settle disqualification investigations and disqualification proceedings, by giving Director Disqualification undertakings. The precise terms of any disqualification undertaking will need to be even more carefully managed, moving forwards.

This is an area where very targeted enquiries will need to be made to the SOS, by the Director, as part of his strategy in dealing with the proposed disqualification claim and now, of course, the compensation claim.

  1. Will the SOS Negotiate a Sum to be Paid in Compensation Ahead of a Court Hearing?

Liquidators of an insolvent company will, in most instances, negotiate financial settlements with Directors targeted by them, taking into account when doing so. commercial and real life factors such as the ability of the director to pay, the merits of the case and the wish on both sides  to avoid contested and costly litigation.

Compare that to the position of the SOS, who is tasked to seek disqualification orders ‘in the public interest’. The following issues spring to mind:

  • Will the SOS be prepared to negotiate the amount of compensation outcomes, or will the SOS insist on going to a final hearing for the court to make that compensation decision?
  • The SOS may, at least in the short term until matters settle down, take the view that it has no ability to negotiate a lower compensatory sum than the SOS believes is due, thus meaning a potentially long , drawn out and expensive court case.
  • Has the SOS even got the power and ability to enter into such compensation settlement agreements? Bearing in mind the decision to make a compensatory award is a decision to be made by the court-will we see the court rubber stamping such agreements?
  • Will the SOS need to seek approval of a proposed settlement with a Director, from a liquidator of the insolvent company, who may have a competing , financial claim against a director? It would appear so.
  • Will a liquidator of the insolvent company, of which the targeted individual was a director, be able to intervene in proposed compensation settlement proceedings? For example, to ensure that the liquidator’s claims are recognised and compensated.
  • The interests of different classes of creditors was recognised and appreciated  in the Noble case, where the Judge awarded compensation to 28 named creditors, apparently leaving out from that award a number of other creditor claims in the insolvent company.
  • We note for example, on the facts of the Noble case, that there were very many  more creditors listed as being owed money by Mr Eagling when he signed off the Statement of Affairs relating to the Company, which showed a deficiency  to creditors of £1.678million, owed to 122 consumer creditors within that figure.

Moving Forwards

The trigger for a director to know whether he will face a compensation claim from the SOS is currently to be found in the pre-action letter sent to the Director (‘the Section 16 CDDA letter’).

A failure by the SOS to set out that proposed compensation claim in the Section 16 CDDA letter, is not, however, a bar to the SOS bringing a compensation claim at a later point in time. Great care is thus needed by and on behalf of the director from the outset.

Whilst outside the scope of this piece, the Director also needs to take the necessary steps to ensure that there are no parallel criminal law investigations or proceedings, in place.

Our director disqualification solicitors are well placed here at NDP to advise on these issues. Click here to see some of our testimonials. Please contact us or call us on 0121 200 7040 for a free of charge initial chat.