Compensation undertakings were introduced in 2015 and are ways in which the Secretary of State agrees repayment of money from the former directors as "compensation" for losses. It is vital to take expert legal advice before agreeing to them - they can be defended and dismissed.
Where a director faces the risk of disqualification as a director then the immediate concerns that most directors will have are as follows:
- what impact will this have on my current business/company?
- does the Insolvency Service understand everything that occurred?
- are they right?
- what are the costs of defending director proceedings?
For a majority of individuals/directors, the above points are the key questions the answers to which will determine their next steps.
Dependent on your circumstances, there may be no need to act as a director of your new business (which can alternatively be an unincorporated entity) or you may prefer to offer a disqualification undertaking on the basis that they are likely to avoided the costs and distraction of defended proceedings and may seek leave to act as a commercial alternative to defended disqualification proceedings.
If disqualification proceedings are defended this will enable the director to set out his/her stated case and seek an independent review of its merits.
The options available are discussed in more detail below.
Where a disqualification undertaking is offered and accepted, or proceedings are contested through to trial and the defence is subsequently unsuccessful, then the director will be disqualified usually commencing 21 days from the final order being made or undertaking being accepted.
- Upon the making of the disqualification order, or acceptance of a disqualification undertaking, the Secretary of State then has two years to issue proceedings for a compensation order to be made against that same director(s) in respect of the loss attributable to them arising from the misconduct which was the subject of the disqualification proceedings. This could of course be at a point some years after the original insolvency.
- on this basis, the signing of a disqualification undertaking to save legal costs would appear to have been pointless, unless there is some sort of assurance which has been provided by the Secretary of State that a compensation order will not be sought.
Avoiding legal proceedings
No one wants to defend legal proceedings – for many claims they serve to incur the costs being sought against you, consume an incredible amount of time (even if a solicitor has been instructed) and are not a comfortable experience.
However, they are often necessary to enforce rights and obligations.
- the legislation introducing the compensation order provisions does however introduce a concept similar to the disqualification proceedings – a compensation undertaking;
- by agreeing to accept a compensation undertaking an individual / director avoids all of the costs of (again) potentially lengthy legal proceedings in addition to avoiding the inconvenience, distraction and risk of such proceedings.
Compensation undertaking and benefit
They provide a director with an alternative to litigated compensation order proceedings where, as with disqualification undertakings, a director may offer to enter into an undertaking to pay a specified sum in compensation, on the basis this would bring all matters to an end.
- a directors liability under a compensation order is determined in accordance with the same statutory guidelines as the court will be subject to when determining the amount payable under a compensation order;
- the benefits of a compensation undertaking are that they avoid the legal costs of disqualification proceedings and the director has an opportunity to negotiate the amount and mechanics of payment. This is in contrast to a court order where the sum could be higher or lower (following an objective analysis of the evidence in support of the compensation order application) and payment terms are not provided for.
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 and providing a compensation undertaking. Please call any member of our director services team for your initial consultation. We are here to help.