Compensation orders are a relatively new remedy available to the Secretary of State but they are hugely important in the context of disqualification claims. 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. Our expert team can help advise on all aspects of compensation orders and help reduce the risk you may otherwise face.
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.
For many directors, particularly those who are not career entrepreneurs or who are reaching the end of their career, the offer of a disqualification undertaking was attractive. It meant that:
- costs could be saved
- certainty reached
- matters concluded quickly
However, following the implementation of new legislation in October 2015, the offer of a disqualification undertaking is not so attractive. This is because directors 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.
One of the most astute appointments I have ever madeA company director we successfully defended against disqualification
Directors’ options when faced with disqualification
The first indication a director will receive of a threatened disqualification will be the receipt of a section 16 letter, which is a notice of the Secretary of State’s intention to commence disqualification proceedings (sent pursuant to Section 16 Company Directors Disqualification Act 1986).
At this point it is important to take specialist legal advice (if the director has not done already) and consider all the options available. These can consist of:
- offering a disqualification undertaking
- making an application for permission to remain as a director
- actively defending a claim
What is a compensation order?
A compensation order is an order that can be sought to require individuals, who formerly acted as directors, to contribute to an insolvent company’s assets where their misconduct led to disqualification as a director.
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.
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
We set out below some further helpful reading and issues for directors to address when considering the risks they face in this respect:
- common allegations of misconduct
- defending legal proceedings
- legal costs of disqualification claims
- liability of disqualified directors
- notifications in section 16 letters
- disqualification and compensation undertakings
- liquidator’s claims and compensation undertakings
- consequences of disqualification
- return to creditors
- applying to reduce a compensation order
- court permission to remain a director
Please also feel free to read our director service case studies to gain more of an understanding of some real-world examples of help we’ve provided.
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
SMEs, directors & shareholders
Successfully defending three directors against director disqualification proceedings and stopping a claim from the liquidator
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Helping a former director to successfully defend director disqualification proceedings and get all his costs back
Our client was a former director of a group of companies which entered into administration following the recession in 2009. The group companies undertook...
5 Apr 2021
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