HomeFWJ TakeawayDirector disqualification claimsCompensation orders explainedCOVID-19 effects – increased risk of disqualification compensation orders

This is my 6th and final blog in a series of blogs discussing the impact on directors of the post Covid-19 clear-up operation that the government and HMRC are likely to conduct. These blogs have addressed the outlook as we currently see it at Francis Wilks & Jones and, if you wish to discuss any of the matters (or related matters) arising, then please do get in touch.

When we last left off, I discussed the resurrection of compensation orders, a power vested in the Secretary of State to seek an order that a disqualified director pay compensation for the loss caused by their misconduct. 

  • this power arose in 2015 but has not been used to any great extent since then, potentially because of the competing interest with liquidators (who may also have rights of action against the former directors of now liquidated companies) and the further resources required to seek such compensation against disqualified directors.
  • however, with the introduction of powers to disqualify directors of dissolved companies (which do not have a liquidator appointed to recover losses arising from directors’ misconduct), the compensation order is likely to be the tool of choice which the Secretary of State uses to recoup some of HMRC’s losses over the lockdown period.

As described in my previous blog, what a director does when faced with potential disqualification may now affect them financially. 

The director’s initial response may improve or undermine any future defence they have and, if this initial response is to agree to be disqualified voluntarily (a disqualification undertaking), then they may have failed to consider the compensation order that may follow (by which point it will be too late).

For directors who are faced with a potential disqualification, the most important aspect is to thoroughly understand the statutory notices sent to you by the Insolvency Service as part of their initial enquiries.  Although this area is not fully developed yet, what those statutory notices say (or don’t say) may impact your future solutions.

At Francis Wilks & Jones we deal with such applications regularly and, if you survive our analysis of your case, we would ordinarily expect to obtain leave for you to act (despite the disqualification undertaking or order that is in existence).

Where a director has signed a disqualification undertaking and is then faced by a compensation claim, ordinarily they have already undermined any defence they have.  Ideally, they should seek legal advice before signing the undertaking (but I would say that).

However, there are other remedies, which include:

  • defending the application for a compensation order – in terms of avoiding legal costs this may conflict with the purpose for signing a disqualification undertaking (which is why the risk of a compensation order should be considered before you sign a disqualification undertaking)
  • seeking to set aside the disqualification undertaking – this may be possible in certain circumstances and, if the disqualification undertaking is set aside, you remove the grounds for the compensation order. However, as set out above, to mitigate your legal costs you are best to seek advice before signing the disqualification undertaking.
  • The above is a brief summary of your options but each case has its own bespoke qualities.

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.

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A company director we successfully defended against disqualification

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