Purpose and commencement
Compensation Orders were introduced by the Small Business Enterprise and Employment Act 2015 to combat the perceived problem of Directors found guilty of misconduct being permitted to run companies, cause losses and then – by offering a Disqualification Undertaking “get away with it”.
This reflected the government’s mandate at the time to increase director transparency and this legislation sought to introduce greater powers in insolvency proceedings, require all companies to provide details of beneficial owners and extend the limitation period for director disqualification claims to be brought.
However, in reality, the perception that directors were escaping any form of liability was always incorrect. As can be seen at our separate webpage here there were already many areas where directors of insolvent companies would face a personal risk of being subject to a legal claim if they caused losses to a company through their misconduct (although this did not extend to their public interest duties).
The only issue, particularly for Liquidators and Administrators of a company, has always been the access to legal advice and assistance where the insolvent company has (in a majority of circumstances) no assets to fund such legal proceedings.
For this reason, we presume, Compensation Orders were introduced, where such proceedings could be instituted by the Secretary of State (who would not face such legal cost funding issues).
Compensation orders were introduced by the Small Business Enterprise and Employment Act 2015 which passed into law on 26 March 2015 and, as set out above, made 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
Section 110 of the Small Business Enterprise and Employment Act 2015 inserts a new Section 15A into the Company Directors Disqualification Act 1986 which provides that a Director subject to either a Director Disqualification Order or a Director Disqualification undertaking may also be liable for a compensation order, such compensation reflecting the loss he or she is alleged to have caused the Company.
Under the Small Business, Enterprise and Employment Act 2015 (Commencement No. 2 and Transitional Provisions) Regulations 2015, the new regime commenced 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.
Timing of Misconduct
As set out above, a directors risk of facing a compensation order will depend upon the period or date when such misconduct (alleged in the threatened disqualification proceedings) occurred.
Even where a company is placed into Administration or Liquidation after 1st October 2015, if the conduct occurred prior to that date then it is unlikely that a compensation order will be sought.
However, for most allegations of misconduct, there is no specific date and it is often the case that alleged misconduct occurred over a period of time which may fall both before and after the above cut-off date.
If this is the case then, from experience, it would appear unlikely that the Secretary of State will seek a compensation rder. However, it is conceivable that such an application could be made for those losses occurring after this date (which may only cover part of the losses suffered during the misconduct period).
Effect of Limitation Period
Amongst these recent (as of writing) legislative changes was the extension of the limitation period applicable to a Disqualification Claim.
Previously, a Disqualification Claim must have been issued within 2 years from the date of insolvency. This provided a tight schedule for the Secretary of State who, until recently, would often only get a report into a director’s conduct by the end of the first 6 months and then had the remaining 18 months to investigate matters, make third party enquiries, approach and perhaps interview directors, prepare their case (the Disqualification Claim, including comprehensive evidence in support) and issue proceedings.
This made it very difficult for proper investigations to be conducted and, perhaps as a result of such difficulties, the period for bringing a Disqualification Claim was extended to 3 years. Curiously though, the 3 year limitation also similarly applies to those cases where misconduct arose after 1st October 2015.
The combination of this legal change and the required date for the misconduct likely means that compensation orders will become increasingly prevalent after 1 October 2018, when the 3 year limitation is nearing for those cases where misconduct also occurred after 1 October 2015 (and a compensation order may be sought).
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.
Please call any member of our Director Services Team for your consultation now on 0207 841 0390. Alternatively email us with your query at firstname.lastname@example.org and we will call you back at a time convenient for you.