Directors Disqualification Proceedings:

Many directors of companies are genuinely shocked when they realise they are to face an investigation, and potential court action, in relation to their conduct running a company that has now entered insolvency (either liquidation, receivership or administration). The Secretary of State for Business, Innovation and Skills has the power to order an investigation into other companies too, but most commonly directors who face disqualification proceedings face it within two years of their company entering insolvency.

The Investigation: What to Expect and How to Engage

Taking a step back, in our experience the best thing a director can do is to ensure that, not only are they confident they are complying with the various directors’ duties imposed upon them by law, they should also ensure that all company decisions and finances are documented meticulously and carefully. In many cases this would prevent investigation in the first place. Secondly, when a company does enter insolvency directors should make a point of cooperating (usually with assistance of their solicitors and accountants) fully with the insolvency practitioner who has been appointed to the company. Directors need to remember that in each insolvency the insolvency practitioner has a duty to compile what is called a D1 Conduct report. This effectively comments on the conduct of the directors and indicates from the insolvency practitioner’s investigations, whether any further investigation is merited by the Department of Business, Innovation and Skills.

The Department is under resourced and it is a common frustration of insolvency practitioners that investigations are not carried out. However, if a particular director is investigated then often the first they will hear about it (although creditors and other parties connected to the company may have been approached already) is upon receipt of a questionnaire from the Department or solicitors acting on their behalf in the investigation.

Legal advice should be taken immediately, if it is not taken beforehand, that such a questionnaire is received. The Secretary of State is not like a normal litigant. He has a duty to act in the public interest. He has a duty to listen and consider carefully representations and explanations that are made to him. It is therefore always worthwhile fully engaging with the investigation process in the hope that disqualification proceedings can be avoided.

Generally the first step will be to obtain a copy of the D1 report and details of exactly what the criticisms of director’s conduct are. There seems little point in answering questions without knowing exactly what the allegations are. Traditionally D1 reports were seen as privileged and were very rarely released. However, the Secretary of State will now more commonly release the D1 report because it does mean more intelligent representation can be made.

An Undertaking

If a decision is made that a director is to be subject to disqualification proceedings the Secretary of State will write to that director with what is commonly known as a Section 16 letter. That is, in terms of Section 16 of the Directors Disqualification Act 1986, the Secretary of State will write to the director articulating exactly what the allegations against him are. The director will be given the opportunity to effectively admit responsibility in relation to the allegations and enter into an undertaking not to act as a director (or as a shadow director – that is somebody exercising control over the company even though they are not formally appointed a director) for the specific period of time requested by the Secretary of State. That will normally be a period of between two and fifteen years.
Legal advice should be taken before any undertaking is given. Directors should bear in mind that admitting breaches of duty may lead to other consequences: for example, certain breaches lead to criminal investigation, and an admission of many breaches of duty may leave the director open to a damages claim from the insolvency practitioner in office if he or she is effectively admitting the company lost money because of his actions.


If the director refuses to give an undertaking then court proceedings will be raised. As observed above, the Secretary of State is different from a normal litigant in that he does not view the litigation commercially (that is offering a settlement based on the cost of running the proceedings). His duty is to pursue what he considers to be in the public interest. Normally significant director disqualification proceedings are raised in the Court of Session. They can be extremely costly to defend to judgement which means that some directors do offer an undertaking even when there may well be a defence to the allegations. The proceedings are normally presided over by one of the commercial judges on a case managed basis (that is the same judge looks after the case throughout). However, even leaving aside appeals, the proceedings can take a year or more to complete. Should the director lose then they can end up paying the majority of the Secretary of States’ expenses as well as their own.
We are delighted to have a no obligation discussion with directors who have concerns about ongoing investigation or potential breach of duty allegations.

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This guide is current 6 January 2013 and is our understanding of the position described at that date. It does not constitute legal advice. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).