Applying to reduce Compensation Undertaking

For a Director of an insolvent company, the commencement of investigations by the Secretary of State into the Director’s conduct may be considered unwelcome, where it would appear targeted at penalising that Director.

If such investigations continue, the Director may ultimately face the option of either agreeing voluntarily to be disqualified by way of a Disqualification Undertaking or they face the prospect of a Disqualification Claim being issued and the expensive route of defending the Disqualification Claim.

For most Directors these legal costs are prohibitive and the option to offer a Disqualification Undertaking is far more preferable, especially if it is offered at an early stage where legal costs can be avoided altogether. 

We discuss dealing with the legal costs of disqualification proceedings separately here.

However, for conduct post 1 October 2015, this does not bring matters to an end.  The Director then faces the prospect of being pursued by the Secretary of State for Compensation for the losses attributable to such misconduct.

This appears to undermine the cost saving historically provided by offering a Disqualification Undertaking.

However, as with Disqualification proceedings, a Director can also avoid Compensation Order proceedings by offering a Compensation Undertaking which, as well as avoiding the legal costs of such proceedings, may enable a sum to be negotiated that is much lower than would be ordered by the Court in litigated proceedings.

Negotiation of a Compensation Undertaking

A Compensation Undertaking will, as with a Disqualification Undertaking, be negotiated by the Insolvency Service (or their instructed solicitors) acting on behalf of the Secretary of State.

Such negotiations are aimed at avoiding the risk that legal proceedings provide – in litigated proceedings the compensation sought may not be obtained in full and there is a risk that the Court may order a lower sum to be paid.  In the alternative, the Director equally faces the risk that a Court may award a higher sum than would be available via negotiations with the Insolvency Service.

Accordingly it is in both parties’ interest to negotiate the sum of Compensation that may be payable.

For a Director, the negotiations should also provide grounds to deter or prevent a separate claim by the appointed Liquidator or Administrator and this can be maximised as part of the negotiation strategy.

Material Changes in Facts or Circumstances

A Compensation Undertaking will be negotiated on the basis of information available at the time on the Director’s alleged misconduct which is available to the Insolvency Service and the Director at the time.

The Court is not involved in such negotiations and it is often the case that the outcome of negotiations depend upon the Parties’ (or their legal representatives’) negotiating skills rather than an independent consideration of the facts (as would occur in Court proceedings).

This information presented to a Director may constitute the claim by HMRC, the claimed loss by a specified creditor or, for allegations where the Director is targeted for passive action (i.e. “allowing” matters to occur), matters which are not entirely clear to either of these parties.

In the alternative, a Compensation Undertaking may be offered on the basis of a threat or events presented to that Director and which s/he relies on to come to a decision to offer a Compensation Order.

Where such events, information or material is subsequently shown to be false, overstated or incomplete then the Director will rightly feel aggrieved that the Compensation Undertaking was offered in reliance on such grounds. 

Seeking amendment of a Compensation Undertaking

As described above, a Compensation Undertaking will usually be negotiated between the Insolvency Service (or their solicitors), acting on behalf of the Secretary of State, and the Director (or his/her legal representatives). 

There will be no independent arbiter as to who is right or wrong or whether the compensation agreed is appropriate to the misconduct alleged.

If there is a material change in facts or circumstances, as discussed above, then a Director may wish to seek an amendment to the Compensation Undertaking provided, perhaps on the basis that s/he was misled or misunderstood the basis for the Compensation Order claim.

Directors with such concerns are provided for in the legislation, which states that a Director can seek an Order for:

  1. The reduction in the amount payable under the Compensation Undertaking; or
  2. Provide for the Compensation Undertaking not to have effect.

Such options will almost certainly be contested by the Secretary of State (who is legally required to appear and respond to such an application) and therefore the decision to make such an application should be seriously considered.

As of writing, even if such an application has merits, there is no ability for the Secretary of State to voluntarily agree to reduce or withdraw a Compensation Undertaking.  An application to Court is necessary if this is the desired outcome (although in such circumstances this will no doubt be on a less contested basis).

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 now on 0207 841 0390. Alternatively email us with your query at info@franciswilksandjones.co.uk and we will call you back at a time convenient for you.