Section 16 letters: what are they and how should you respond?

Receiving a Section 16 letter from the Insolvency Service is a worrying time for directors, since it has the potential to affect your livelihood and reputation. With the consequences of director disqualification being so severe, if you take specialist advice and act quickly, you have a real opportunity to shape the outcome of an investigation. Below, we explain what a Section 16 letter is, what you need to know about them and how to respond when you receive a letter from the Insolvency Service.

What is a Section 16 letter?

A Section 16 letter is a formal letter before action issued by the Insolvency Service (sent on behalf of the Secretary of State) to give you notice that it intends to bring director disqualification proceedings against you. This notice is a statutory requirement under Section 16(1) of the Company Directors Disqualification Act 1986 (“CDDA”) and must be sent at least 10 days before legal proceedings are issued at court.

A pre-Section 16 letter is sent prior to a Section 16 letter. If you receive a Section 16 letter from the Insolvency Service, the Insolvency Service’s investigation into your conduct has usually finished and it believes that there is enough evidence of ‘unfit conduct’ to justify a ban in the public interest.

A Section 16 letter may also set out an intention to seek a Compensation Order for losses resulting from the alleged misconduct.

A Section 16 letter will be accompanied by other enclosures, including the form of a disqualification undertaking.

A Section 16 letter is usually sent from the Legal Services Directorate of the Insolvency Service, who act for the Secretary of State.

Contents of a Section 16 letter

A Section 16 letter typically includes the following information:

A summary of the allegations

A Section 16 letter provides a detailed description of the specific conduct said to be unfit. This may include conduct such as trading to the detriment of the Crown (i.e. not paying taxes), failing to keep proper accounting records, or misusing Bounce Back Loans. Details of the alleged conduct of unfitness is usually found in the annex to a Section 16 letter.

Proposed disqualification period

A Section 16 letter will confirm the specific length of the ban the Secretary of State intends to seek. This ranges from 2 to 15 years, grouped into three brackets depending on the seriousness of the misconduct: 2–5 years, 6–10 years, and 11–15 years. Misuse of Bounce Back Loans tend to fall in the upper bracket.

Voluntary disqualification undertaking

You will be invited to accept a voluntary undertaking/ban instead of going to court. Doing so often results in a discount to the disqualification period and avoids liability for court fees and the government’s costs. If you accept a voluntary undertaking without court proceedings being issued, the Secretary of State will not usually seek to recovery any of their costs. A voluntary undertaking can be accepted even once court proceedings are on foot. If a voluntary undertaking is accepted once court proceedings are issued, you will be liable to pay the Secretary of State’s costs too.

Access to evidence

A Section 16 letter  will provide the opportunity to request a copy of the draft evidence (typically a draft affidavit and supporting exhibits or depending on the nature of the claim, the supporting exhibits only) that the Insolvency Service intends to rely on in court. In the annex to a Section 16 letter, it will usually provide a list of the key evidence.

Compensation orders

A Section 16 letter may say that the Insolvency Service intends to seek a financial compensation order against you in order to recover losses caused to creditors.

Other civil or criminal investigations or actions

The decision (or not) to take disqualification will not prevent other investigations or legal proceedings, whether civil or criminal, from being conducted by the Insovency Service (on behalf of the Secretary of State), the office holder of the insolvent company (for example a liquidator or administrator), or other regulators.

Other individuals involved

If your fellow directors (or shadow/de facto directors) are also subject to disqualification proceedings, this may be noted in a Section 16 letter.

Instructions on how to respond

A Section 16 letter will explain how to respond, including the opportunity to make written representations to argue why disqualification is not in the public interest. It is crucial to obtain specialist legal advice to ensure robust representations are prepared and sent in response to a Section 16 letter.

Questionnaires

Sometimes, a questionnaire is enclosed which asks for further details about the company's management, its finances, and the role of external advisers. However, in our experience, a questionnaire is sent prior to the issue of a Section 16 letter.

Options for responding to a Section 16 letter

If you receive a Section 16 letter, you have several options to respond. The correct path for you will depend on the extent of the alleged misconduct, the strength of the evidence obtained by the Insolvency Service and your future employment plans. We have set out some common options below, but it is important to seek legal advice from a specialist in director disqualification before taking any further action.

Your options for responding to a Section 16 letter include:

Making representations

You can send written representations to the Insolvency Service to argue why you should not be disqualified. In these representations, you can put forward fresh evidence or legal arguments. Robust and strategic representations are key.

If you are successful, the Insolvency Service may withdraw the case entirely. Many director disqualification cases are resolved in this way.

Giving a disqualification undertaking

You may elect to accept a voluntary undertaking, which has the same legal effect as a court order but ends the threat of court action (and its associated costs) and usually results in a shorter disqualification period.

With proper legal advice, the terms of the undertaking, including the wording of the specific allegations of "unfit conduct" to which you admit, can often be negotiated.

If a disqualification undertaking is accepted, you must resign from any positions you hold as a director, unless you have permission from the court to act as a director whilst disqualified. In addition, there are a number of restrictions in place during the period of disqualification.

Defend the claim in court

If you disagree with the allegations or the Insolvency Service rejects your representations, you can choose to defend the case in court.

This is the most expensive option. If the court makes a disqualification order against you, you will usually pay the government's legal costs. If the Insolvency Service/Secretary of State loses or withdraws the claim, they may have to pay yours. In our trial experience, the Secretary of State has been ordered to pay our client’s/director’s legal costs upon successfully defending the Secretary of State’s claim.

The Insolvency Service must only bring cases under the public interest test, so weak cases can still be abandoned before trial.

Request evidence and more time

Before deciding what to do, you can:

• Ask to see the supporting evidence.
• Request access to the statutory books and records of the insolvent company.
• Ask for more time to take advice and prepare your response.

Apply for Permission to Act

Before you accept a disqualification undertaking, you may still be able to apply to the court for permission to act as a director or manager of a named company whilst disqualified under section 17 CDDA. This is often negotiated alongside an undertaking. Timing is important, particularly if offering a voluntary undertaking; the goal is to minimise disruption and, where appropriate, prepare the application swiftly.

The risks of ignoring a Section 16 letter

You should never ignore a Section 16 letter. If you do not respond to a Section 16 letter, the Secretary of State will issue a formal disqualification claim against you at court. You will be liable to pay the Secretary of State’s cost if a voluntary undertaking is accepted once court proceedings have been issued at court.

Ignoring a Section 16 letter can lead to:

• Automatic disqualification: If you don’t challenge the proceedings, the court is likely to grant a disqualification order for the full disqualification period sought by the Insolvency Service.
• High legal costs: You will be ordered to pay all the Secretary of State’s legal costs, which are often substantial. Accepting an early undertaking avoids these costs.
• Loss of the chance to defend yourself: You’ll lose the opportunity to make representations which may result in a shorter disqualification or the case being abandoned.
• Negative perception in future proceedings: Failing to cooperate can be viewed unfavourably in future legal proceedings.
• Immediate restrictions: Once a disqualification order is made, you will be immediately banned from being a director or forming, marketing, or management of any UK company. Breaching these restrictions is a criminal offence.
• Public record: A disqualification undertaking or disqualification order will be filed with the Registrar of Companies. Disqualified director details are a public record and a register is maintained at Companies House.