Luke Oliver explores the strict requirements for company directors who apply for a debt relief order, and the consequences for failing to follow them.
Published June 2024
DRO advice tops the charts
At the Specialist Debt Advice Service, debt relief orders are the main enquiry topic for our professional clients. They account for over a third of all enquiries into our service. The complexity of the legislation, the interpretation of guidance, and the official status held by DRO intermediaries all contribute to anxieties for debt advisers.
A particularly thorny issue is the stringent rules governing company directors under DRO restrictions. People who continue acting as directors in ignorance or contempt of the rules risk prison, on top of hefty fines.
Let's explore the details and ensure your clients stay on the right side of the law.
Prohibition for company directors
A company director who applies for a DRO must request permission from a judge before they continue in their role, or start a new one. Failure to do so is a criminal offence that can be punished by a prison sentence of up to two years, plus a fine.
Direct and indirect involvement
When you advise a client who runs a limited company, it's safest to assume that any activity that may amount to "taking part in or being concerned with it" is forbidden. The prohibition's wide scope covers any involvement in company management by a debtor under a debt relief order.
This extends beyond official titles to any form of indirect management, including via third parties. A client who asks their partner or family member to replace them as a director and act on their instructions is breaking the rules, and putting that person at risk of criminal enforcement.
Inactive directors
The ban also extends to people who are inactive in their roles as director. One key source on this topic, Mithani's Director Disqualification, states:
'It is not merely positive acts of incompetence which may lead to a finding of unfitness. Incompetence may also be established from inactivity or failure to act'.
A client could be named as a director on company records as a result of historic activity, and still break the law unless they have taken steps to formally terminate it.
Impact of advice on insolvency options
Applications for permission to be a director are not guaranteed to succeed. Similar caselaw on bankrupt directors suggests a high chance it will be refused.
Debtors whose livelihoods depend on their being appointed or acting as a director, or being directly or indirectly involved in the promotion, formation, or management of a company might want to consider alternative debt solutions. This would avoid the adverse consequences of potential refusal.
How the application might be treated
The official receiver must be notified of the application and oppose it at the hearing if it is in the public interest to do so.
Applications for permission are uncommon. Mithani's Director Disqualification comments that there is no reported English case dealing with it directly.
Mithani's commentary explores the factors the court is likely to consider, outlining the main principles:
the court can take into account any relevant factor, its discretion is broad and unfettered
each case is decided on its individual facts
protection of the public is of paramount importance
the reason for entering the DRO and whether that affects the applicant's ability to run a company is relevant
the reason for the imposition of any debt relief restrictions is relevant
the needs of the debtor are relevant in the balancing exercise
it is unlikely permission will be granted without conditions
the court has the power to grant permission retrospectively but is unlikely to exercise it save in extreme cases
Details of one application were reported in the February 2018 Insolvency Service DRO Team Newsletter. The Insolvency Service opposed the application in line with the DRO team's stated policy. Nonetheless, the court granted permission with some restrictions on the director's role during the moratorium.
The facts of the case were arguably exceptional. Debtors who intend to apply must be advised that success is by no means guaranteed and outcomes difficult to predict. Each case turns on the judge's interpretation of the facts and their application of the relevant principles.