Compensation orders were introduced in 2015 and can give rise to a personal money claim against directors once they have been disqualified. It is therefore vital to take expert legal advice to avoid mistakes. Otherwise you might give an undertaking to be disqualified only to find yourself on the receiving end of a significant claim for damages.
Director disqualification proceedings exist to protect the public interest and prevent directors, who may have been liable for acts of misconduct in running a company, from continuing to act as a director of a successor company.
However, until now, directors disqualified face no financial penalty or other deterrent from acting as such again, and thus the disqualification regime may not have had the impact it was originally intended to have.
The reason for this may have been the growth in small companies. As at the end of 2020, there were 5.7 million businesses in the UK of which 5.5 million were “micro-businesses” employing between 1-9 people.
This is undoubtedly very different to the economic position in 1986, when considerably less individuals acted as directors and the loss of such status was more effective as a deterrent.
From 2000, directors faced with director disqualification proceedings were able to avoid the legal cost of proceedings completely by offering to undertake to the Secretary of State not to act as a director or be involved in the promotion, formation or management of a company (a “disqualification undertaking”).
As a result, and with the considerable threat of the legal costs of proceedings, most directors chose not to defend a disqualification claim but instead offer a disqualification undertaking (even if they did not agree, as most do). The option thereafter was that they could set up their own unincorporated business, one in partnership with another or retire. Either way, the option of avoiding very expensive litigated disqualification proceedings proved an attraction to signing a disqualification undertaking.
Small Business, Enterprise and Employment Act 2015
This legislation was introduced in various phases throughout 2015 as a result of a public demand for more transparency of directors and their actions. This led to the requirement to publicise (at Companies House) the beneficial ownership of companies and various other changes intended to make directors and companies (and their owners) more responsible for their actions.
Once of these changes was to impose a requirement that ANY director disqualified for misconduct in the management of a company will be liable for an order to compensate for the loss caused by such misconduct, provided the misconduct occurred after October 2015.
As such misconduct is often the loss of tax revenue by HMRC, this almost certainly will lead to disqualified directors being accountable for most or all of the company’s tax liabilities, rather than just PAYE and NIC as can be sought with a personal liability notice.
How much will be payable under a compensation order?
The amount repayable remains subjective, but will almost certainly be easier to ascertain where a director signs a disqualification undertaking (which will set out the losses to creditors, particularly HMRC).
As the most common allegation is a failure to pay HMRC, it is without doubt that a compensation order will be a method employed by central government to recover tax revenues lost as a result of insolvency. This is a partial reverse of direction taken from when HMRC’s preferential status as a creditor (in insolvency) was reversed in 2003.
Various defences exist to counter such issues, which (as of writing) are yet to be thoroughly explored in proceedings. This could include the analysis of where such monies would have been taken from and that the Director was not entirely to blame.
How will this overlap with liquidator claims?
However, from a liquidator’s perspective, if a director has lost all of his assets or is bankrupt following the enforcement of a compensation order, then there is nothing for the company in liquidation or its creditors to recover. On this basis, it may be the case that a claim by a liquidator is made more quickly following the commencement of insolvency or is otherwise lost.
Should I sign a disqualification undertaking?
This is a difficult question to answer as this depends on the allegations of misconduct. However, without legal advice, we suggest the answer is “no”.
A disqualification undertaking is often signed to avoid legal costs and tends to ignore the fact that (without legal advice) the director may have a defence and, worst still, by signing the disqualification undertaking may be immediately liable for a compensation order (with far greater costs consequences as described above).
At Francis Wilks & Jones we deal with a considerable amount of director disqualification proceedings and claims by liquidators and can advise you on whether a disqualification undertaking will safeguard your interests or a claim for a compensation order, and your best options.
Please call any member of our disqualification team now for assistance. Don’t settle for second best – call the experts.