This is my 5th of a series of 6 blogs dealing with what will be happening over the next few years in terms of how the government recovers its position financially following Covid-19.
These blogs are not intended to cover all areas of the economy, but are intended to focus on directors, their actions (innocent and not so innocent) during the pandemic and their potential personal liability.
HMRC is obviously a big component of this decision-making, and it appears likely that the focus of any efforts to recover the government’s financial losses will be in respect of allegedly fraudulent claims for grants and loans paid to their companies (and potentially themselves, dependant on the circumstances).
In my last blog I discussed how directors could be targeted for such misconduct, by way of director disqualification (even where your company has not been placed into insolvency proceedings). Within this blog I intend to cover the personal liability directors may face by being subject to compensation orders, which can arise when a director has been voluntarily disqualified or disqualified by a court order.
So, compensation orders – what are they?
Well, for those of you who want real legal detail, the source of this is Part 9 of the Small Business, Enterprise and Regulatory Reform Act 2015 (“SBERR”) followed by secondary legislation (or regulations) under which the Secretary of State implemented this legislation as law.
The Compensation Rules (as I shall call them) provide that
- where a director (now a former director) of a limited company either (1) undertakes to be disqualified; or (2) is disqualified as a director under a court order, then
- s/he shall be liable to pay such amount as is determined (by the court or agreed with the Secretary of State) for the benefit of a specific creditor, or class of creditors, or as a contribution to the assets of the company.
Where a company is in liquidation, determining a class of creditors or contributing to the assets of the company would enable an appointed liquidator to distribute this payment to creditors in accordance with the standard insolvency rules.
However, where a company is dissolved, the only option available appears to be that the compensation is paid, “for the benefit of…a creditor” (i.e. HMRC).
- directors will be able to avoid the costs of the related legal proceedings (which are likely to be short, given that there is almost a mandatory liability once a disqualification undertaking is signed or a disqualification order is made) in a similar manner to the procedure for director disqualification, by agreeing to a compensation undertaking.
A compensation undertaking is a voluntary undertaking to pay such compensation, which may be available to be paid on a deferred basis.
How much will directors have to pay?
- given the circumstances of CBILs and bounce back loans, and the fact that disqualification is based on misconduct in taking such loans, then almost certainly the compensation will be the loan sum, plus interest and statutory charges.
- if a compensation order is made at court, the Secretary of State’s legal costs will also be added to this bill.
So, a director taking a bounce back loan of £60,000 could easily find himself or herself having to repay £100,000 or more. This is only guesswork, but similar parallels are brought with regard to liquidator claims that we have historically dealt with.
Interested to read more about bounce back loans? Read our guide on director disqualification and bounce back loans.
In my next blog I will try and address how to deal with these types of claim. If in the meantime you require any assistance related to these or connected matters, then please do not hesitate to contact me.
Should you require any assistance relating to director accountability, contact our director services team. Whatever your situation, we have almost certainly seen it before and our experience can help you find the solution you need.
FWJ were very hands-on, getting involved from an early stage in seeking to avert an expensive set of litigation proceedings. I am more than happy to recommend their services, particularly when it comes to considering complicated issues or complex proceedingsA client who was facing a liquidator claim for the improper withdrawal of sums from a company. We had the claim dismissed