When a company goes into insolvency, directors might face a range of claims including director disqualification. These now allow new style compensation order claims to be made against the former directors personally. Our team can help advise and defend you.
When a company is placed into insolvency, be that administration (in or out of court) or liquidation, then for the company’s shareholders and its directors that may appear to be the end of matters. The business has either been sold as a rescue process out of administration or the company has reached the end of the road and the only matters that remain are for its assets to be turned into cash (i.e. liquidated) and, net of costs, distributed to creditors in proportion to their claim.
However, this is certainly not the end for directors and what then unfolds is a two stage process as follows:
- investigations into the directors’ actions in the period leading up to insolvency, with a view to either issuing disqualification proceedings or, more seriously, instituting criminal proceedings if misconduct is found; and
- investigations into the company, its business, its assets and any recoveries that can be made against third parties and/or directors of the company as part of the administration or liquidation. These include claims by the company and claims by the administrator / liquidator which arise out of the insolvency proceedings.
Historically, the first point above was the responsibility of the Secretary of State (acting through the Insolvency Service) with the focus on protection of the public interest. The second point would be the responsibility of an Insolvency Practitioner – appointed as either administrator or liquidator – with the objective of recovering assets for the insolvent company estate and, ultimately, for the benefit of creditors.
In more recent years, the Insolvency Service has sought to issue some claims under both areas, although this is considerably less common.
Who can seek a compensation orders?
Compensation orders can only be sought by the Secretary of State (usually acting via the Insolvency Service). An appointed liquidator or administrator cannot seek such a remedy unless they are also the Secretary of State (or the official receiver acting under a delegated authority from the Secretary of State).
- the option for the Secretary of State or Insolvency Service to pursue a compensation order appears to add a third threat to directors whose company has been placed into insolvency;
- unlike the public interest concern dealt with by the disqualification regime, a compensation order does not seek to prohibit or restrict a director (although this may be an indirect effect) but instead seeks compensation for the losses caused by the director’s misconduct provided s/he has been disqualified.
Losses recoverable under a compensation order
The losses recoverable under a compensation order (or a compensation undertaking) are limited to the following:
- the losses caused to a specific creditor;
- the losses caused to a specific group or class of creditor;
- the losses caused to the company.
Conflict with claims by the liquidator or administrator
A lot of claims that can be brought against a director by an appointed liquidator or administrator will almost certainly overlap or refer to similar matters as addressed in the disqualification proceedings.
Examples of the types of claim that liquidators might bring against a director are as follows:
- breach of a director’s fiduciary duties;
- wrongful / fraudulent trading;
- recovery of directors loan account balance;
- transactions at an undervalue;
- Preferring creditors.
All of these claims can be subject to misconduct alleged in disqualification proceedings, although these specific descriptions are not used (as the disqualification proceedings are not restricted by the statutory requirements applicable to the above legal claims, but rather refers to misconduct as a director generally).
However, it is almost certain that a contribution order will be sought for almost precisely the same misconduct that a liquidator/administrator may pursue a director for.
Risk to directors and others
The risk to directors is that almost certainly, once they are disqualified, they may face both a compensation order application and a claim by the appointed liquidator or administrator.
- in addition, for appointed liquidators / administrators and the Secretary of State, if a director has limited assets to meet such obligations then there remains a risk that it will be the first to secure such an order who is able to obtain a return;
- where the Secretary of State has secured a compensation undertaking quickly, it is conceivable that this may be undermined by further proceedings issued by an appointed liquidator or administrator (which may result in that individual’s bankruptcy).
Alternatively, and perhaps more likely, is that where a director has been disqualified and is likely to be subject to compensation proceedings, the appointed liquidator / administrator will not seek to pursue any proceedings against those same directors by reason of the above risks.
This outcome is obviously of incredible concern to creditors, as the compensation proceedings may not automatically provide a return to the insolvent company.
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 consultation for assistance. We are here to help.