Compensation orders were introduced in 2015 and can lead to personal claims against directors who find themselves disqualified from acting. 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 money claim.
Where a company is placed into liquidation or administration all directors of that company (past and present) face the risk of their conduct as a director being investigated by the Secretary of State and the liquidator of the company.
- these investigations may ultimately lead to steps being taken to seek the disqualification of such directors;
- for many directors, particularly those who are not career entrepreneurs or who are reaching the end of their career, the offer of a disqualification undertaking has the dual benefit of saving legal costs (which they would be otherwise liable for if proceedings were issued to disqualify them) and disposing of matters quickly.
However, following the implementation of legislation in October 2015, the offer of a disqualification undertaking is no longer a “soft option”, as such directors may now be liable to compensate the company for the loss suffered by the director’s misconduct.
The first indication a director will receive of a threatened disqualification (in circumstances where a company has been placed into insolvency) will be upon receipt of a section 16 letter. This is a notice of the Secretary of State’s intention to commence disqualification proceedings (sent pursuant to section 16 Company Directors disqualification Act 1986).
At this point it is important to take specialist legal advice (if the director has not done already) and consider the options.
- these options will comprise either offering a disqualification undertaking, potentially in combination with a consideration as to whether permission to remain a director should also be sought; or
- actively defending the disqualification claim.
A range of other strategies, dependent on your personal circumstances, will also exist.
However, where the conduct complained of by the Secretary of State occurred after October 2015, directors face the additional risk of being subject to a compensation order.
What is a compensation order?
A compensation order is an order that can be sought to require individuals, who formerly acted as directors, to contribute to an insolvent company’s assets where their misconduct led to disqualification as a director.
- unlike conventional litigation proceedings, a compensation order can be described as a strict liability offence – meaning that the grounds for seeking the order have already been fulfilled and it is difficult to dispute;
- for a majority of disqualified directors, the effect of being subject to a compensation order may be that they are personally required to repay losses incurred by HMRC – who are often the largest creditor (and the creditor most prejudiced) where the company has been placed into insolvency.
What should a director consider?
It is important for a director to consider the risk of a compensation order very early on in proceedings. We set out below some issues for directors to address when considering the risks they face in this respect:
- liability of disqualified directors;
- notifications in section 16 letters;
- disqualification & compensation undertakings
- liquidator’s claims and compensation undertakings
- return to creditors;
- applying to reduce compensation undertaking.
At Francis Wilks & Jones we regularly advise and assist Directors with regard to threatened disqualification proceedings and defending disqualification claims, offering a disqualification undertaking, seeking leave to act and facing the risk of a compensation order. Call us today for help.