Compensation Orders 10 FAQs

Here you can download our Compensation Orders: The Risk to Directros 10 Frequently Asked Questions Answered booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

The Small Business Enterprise and Employment Act 2015 (“SBEE”) was passed into law on 26 March 2015 with some very serious changes to the way in which Directors can be made accountable for a company’s actions, particularly where it has been placed into insolvency proceedings.

Section 110 of the SBEE inserts a new Section 15A into the Company Directors Disqualification Act 1986 which provides that a Director subject to either a Disqualification Order or a Disqualification undertaking may also be liable, upon application, to a Compensation Order being made against him or her, such compensation reflecting the loss he or she is alleged to have caused the Company.

Historically, it was not unusual for Directors to be targeted for disqualification by the Secretary of State, where any misconduct was found. The most common grounds for a finding of misconduct can often be the simple accrual of large tax liabilities to HMRC. Conventionally, a Director subject to any such proceedings would have signed a Disqualification Undertaking to avoid being pursued for legal costs, with a view to continuing in a self-employed capacity, or as an employee or shareholder.

However the new legislation means that Directors in such circumstances may in future be liable for all losses that can be attributed to their personal behaviour or misconduct, regardless as to whether it was deliberate, negligent or accidental. In the above example this could be the company’s tax liability.

Accordingly, the protection of limited liability is greatly reduced where the Company is placed into insolvency and this article attempts to address the risk to Directors being made.

1. Which Directors Are Covered By These Changes?

An application for a Compensation Order may be brought against Directors of companies that have been placed into insolvency proceedings and against whom Disqualification proceedings have been brought, or are proposed to be brought, by either the Secretary of State or the Official Receiver.

Directors subject to Disqualification Orders or Undertakings in respect of live companies, for example where they have failed to file accounts or reports at Companies House, could also be subject to a Compensation Order but it is difficult to see how the Court could adjudge any loss in these situations.

Of course there is an ability for the criminal courts to make a Disqualification Order against Directors in serious indictable criminal proceedings, particularly in relation to allegations of fraud.

It is also conceivable that in such circumstances Directors could then be defending Compensation Order proceedings where any such sentence has been passed and a Disqualification Order made by a criminal court under Section 2 of the Company Directors Disqualification Act 1986.

2. When Does This New Procedure Start?

Under the Small Business, Enterprise and Employment Act 2015 (Commencement No. 2 and Transitional Provisions) Regulations 2015, this new regime commences from 1st October 2015.

The transitional provisions apply this commencement date to “the main transgressor’s conduct” and not when the company insolvency commence. Accordingly, even where an insolvent liquidation or Administration proceedings commence after 1st October 2015, the risk to the Director only exists if his/her conduct complained of post-dated 1st October 2015.

3. What Limitation Period Applies To The Bringing Of Compensation Order Application?

Under these new legal requirements a Compensation Order may be sought by the Secretary of State at any time before the end of 2 years beginning with the date on which a Disqualification Order is made or a Disqualification Undertaking is accepted from the Director on behalf of the Secretary of State.

The commencement dates for the limitation period starts on the date when the order/undertaking is executed, and not when the disqualification commences (which is usually 21 days from the date of a Disqualification Order or Undertaking).

This therefore leaves a distinctly long period of risk for Directors of insolvent companies, as the new legislation also extends the limitation period for disqualification proceedings to 3 years from the date of insolvency.

Accordingly a Director could face a scenario where just before the end of 3 years Disqualification proceedings were issued and, if defended, this could continue through the courts for a period of up to 2 years (or more). If at trial a Disqualification Order is made, a further period of 2 years will apply from the date of that Disqualification Order during which time a Compensation Order application may be issued (with the consequential time spent dealing with the litigation proceedings thereafter, if defended).

Although we would expect a Compensation Order application to be a more straightforward process, this could nevertheless take up to 1 year and accordingly (in the above scenario) a Director of an insolvent company could be at risk for up to 8 years after the date of insolvency.

Conversely, other unusual circumstances exist where a Director who is disqualified for a relatively short period (2-4 years) may find that they are released from the Disqualification Order (or Disqualification Undertaking) before a Compensation Order is made.

4. Why Give a Disqualification Undertaking??

Compensation orders will be available to the Secretary of State regardless as to whether the original disqualification proceedings were contested or not.

In England and Wales most Directors are disqualified by way of a voluntary undertaking, which is usually provided by Directors so as to avoid the legal costs likely to be incurred in contested Disqualification proceedings, which can continue for 2-3 years and can incur quite significant legal costs without any certainty of success.

Since April 2013 civil litigation proceedings have not been possible for most types of claim or Defence on a “no win no fee” basis, thus further restricting the legal funding options available to Directors wishing to defend such proceedings.

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. What is The Likely Effect of a Compensation Order?

6. Are There Any Alternatives To Litigated Compensation Order Proceedings?

7. How Much Will I Have To Pay Under A Compensation Order Or Undertaking?

8. What Are My Options?

9. What Are The Options Once A Compensation Undertaking Is Signed?

10. What Are The Main Issues To Address When I Receive A Letter From The Insolvency Service?

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.