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A director who has been disqualified by the Insolvency Service is at considerable risk of additionally becoming liable for the loss suffered as a result of his/her misconduct by the imposition of a compensation order shortly after or following disqualification.
The purpose of a compensation order is to require the disqualified director to repay losses which the disqualification proceedings identify, through the relevant grounds of unfitness, that his/her misconduct have caused.
For directors agreeing to sign a disqualification undertaking the misconduct will be referred to on the schedule and thus it is vital that any director seeking to offer a disqualification undertaking seeks legal advice before making such an offer.
Otherwise, subject to the emergence of common law decisions in future years which may decide areas of dispute or interpretation within the legislation, a director may immediately face the prospect of a compensation order application following the delivery of a signed disqualification undertaking or the making of a disqualification order as part of a defended disqualification claim.
When is a director liable to be subject to a compensation order?
Section 15A (3) of the Company Directors Disqualification Act 1986 provides the following conditions for a compensation order:
- The person is subject to a disqualification order or disqualification undertaking under this Act, and
- Conduct for which the person is subject to the order or undertaking has caused loss to one or more creditors of an insolvent company of which the person has at any time been a director.
Accordingly there must be demonstrated a loss to at least one creditor, and the grounds of misconduct which support the disqualification undertaking or order must refer to actual losses rather than mere risks of such behaviour threatening the public interest.
Examples of misconduct
By way of example, as we have identified one of the most common grounds for a finding of misconduct sufficient to disqualify a director is the accrual of large tax liabilities to HMRC due a deliberate or implied policy of paying other creditors in preference to HMRC, or in any way acting to cause HMRC specific detriment as opposed to unsecured creditors suffering in the liquidation generally.
However, misconduct can range from circumstances where a director has allowed the company to act contrary to the public interest causing direct losses, through to commercial decision-making which serves to deplete assets of the company or unfairly prejudice a creditor or groups of creditor.
What liability is the director likely to be responsible for?
The liability for a compensation order will depend upon the Secretary of State’s application and whether the remedy sought is in respect of loses by a specified creditor(s), a specified group of creditors or as a contribution to the company’s assets to reflect the loss suffered as a result of such misconduct.
When making such an application and seeking the amount payable under a compensation order, the legislation requires that the Secretary of State have regard to:
- the amount of loss;
- the nature of the misconduct;
- any contribution or recompense paid by the director subject to the compensation order.
By which date must a compensation order be sought?
As discussed here Secretary of State has two years from the date of insolvency to issue a disqualification claim, 3 years for misconduct arising after 1 October 2015.
On average, if the disqualification claim is contested it will be at least one more year until a director is disqualified (unless a disqualification undertaking is offered earlier).
Upon the disqualification undertaking offered being accepted, or upon the making of a disqualification order (i.e. not from the date of commencement of the disqualification), the Secretary of State has two further years to issue proceedings seeking a compensation order. If such proceedings are contested, then it would not be unusual for a final compensation order to not be made for at least another year.
Accordingly, from the date of insolvency, disqualification proceedings could consume a further 7 years before they are concluded.
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 court permission to act as a director and facing the risk of a compensation order.
Please call any member of our Director Services Team for your consultation now. Alternatively email us with your query at email@example.com and we will call you back at a time convenient for you.