Compensation orders can mean a disqualified director has to repay compensation for losses sustained as a result of the director’s alleged misconduct. This is serious. For example, few people realise that agreeing to a voluntary disqualification undertaking can leave them exposed to potentially large personal money claims which are hard to defend.

Investigations into director conduct

Where a company is placed into liquidation or administration all directors of that company (past and present) face the risk of their conduct as a director being investigated by the Secretary of State and the liquidator of the company.

These investigations may ultimately lead to steps being taken to seek the disqualification of such directors. 

Compensation orders

New legislation introduced in 2015 now means that directors who have been disqualified can be held liable for all losses that can be attributed to their personal behaviour or misconduct, regardless as to whether it was deliberate, negligent or accidental.  This was a highly significant change which has had wider impact on the disqualification regime, particularly disqualification undertakings.

Disqualification undertakings – be careful

For many directors, particularly those were not career entrepreneurs or who were reaching the end of their career, the offer of a disqualification undertaking before the changes in 2015 was attractive. It meant that:

  • costs could be saved
  • certainty reached
  • matters concluded quickly

However, following the implementation of legislation in 2015, the offer of a disqualification undertaking is not so attractive. This is because directors who agree to be disqualified may now be personally liable to compensate the company for the loss suffered by the director’s misconduct in the form of a compensation order.

It is important therefore to take specialist legal advice at an early stage, especially if you are considering a voluntary undertaking.  The last thing you want to do is accept the undertaking in the belief that it draws a line under the claim, only to find yourself facing a significant claim for repayment of money (which can run into hundreds of thousands of pounds) as a result of you signing off the undertaking.

Strict liability – compensation orders hard to defend

Unlike conventional litigation proceedings, a compensation order can be described as a “strict liability offence “– meaning that the grounds for seeking the order have already been fulfilled by the disqualification taking place – and therefore it is difficult to dispute.

This is why taking advice before signing the undertaking is so important. I can be possible to negotiate the compensation order away – so that the risk of a later claim is removed.

Effect of the compensation order

For a majority of disqualified directors, the effect of being subject to a compensation order may be that they are personally required to repay losses incurred by HMRC – who are often the largest creditor (and the creditor most prejudiced) where the company has been placed into insolvency.

These losses can be considerable and if not paid – could lead to bankruptcy for the former director.

What should a director consider?

It is important for a director to consider the risk of a compensation order very early on in disqualification proceedings. 

There are always options to look at and our experienced team can find the solution which works best for you. For example

  • it is vital to balance the risk of agreeing to an undertaking with the possibility of a claim for compensation against you personally in the future
  • we can help advise on whether it might be better to defend the current proceedings and have them dropped (together with the threat of the compensation order), rather than simply agreeing to an undertaking and leaving you possibly exposed
  • we could explore whether the Secretary of State might agree not to pursue a compensation order in return for an agreement to a voluntary undertaking

At Francis Wilks & Jones, we regularly advise and assist directors on all aspects of the disqualification regime, including compensation orders. Please call any member of our disqualification team for your consultation today.

FWJ were very hands-on, getting involved from an early stage in seeking to avert an expensive set of litigation proceedings. I am more than happy to recommend their services, particularly when it comes to considering complicated issues or complex proceedings.

A client who was facing a liquidator claim for the improper withdrawal of sums from a company. We had the claim dismissed

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