A director compensation order is a court order requiring a disqualified director to compensate creditors for quantifiable loss caused by the conduct for which the director was disqualified.
For directors facing a possible compensation claim, the position is not predetermined. Disqualification does not automatically create a liability to pay compensation, and receiving correspondence from the Insolvency Service does not establish the amount claimed or prove that the necessary legal conditions are satisfied.
A compensation investigation will normally follow a disqualification order or undertaking. The Insolvency Service must then consider whether the admitted or proven conduct caused an identifiable loss to creditors. Directors can respond to the proposed claim, challenge the alleged connection between their conduct and the loss, and provide evidence of payments or recoveries already made.
What do the latest compensation order statistics show?
The Insolvency Service’s enforcement outcomes for 2025/26 (published at the end of January 2026) record 125 civil compensation orders and undertakings in Great Britain.
The combined reported value of those outcomes was £4,548,018. April 2025 recorded the highest monthly number, with 15 outcomes, while May 2025 recorded the highest monthly value at £528,599.
These figures require careful interpretation. The source combines compensation orders made by the court with compensation undertakings accepted by the Secretary of State. It does not provide a separate total for each type of outcome.
- The reported value also does not necessarily represent money already paid to creditors.
- It is the combined value of the orders and undertakings recorded on the Insolvency Service’s administrative systems.
- The Insolvency Service warns that the values may be revised upwards because information can take time to be recorded.
Nevertheless, the figures demonstrate that compensation is an established part of director disqualification enforcement. Directors considering a disqualification undertaking should therefore consider the possibility of a later financial claim as well as the proposed length of the disqualification period.
Our guide to director disqualification compensation orders explains how the compensation regime fits within the wider disqualification process.
When can a director compensation order be made?
The compensation regime is governed by sections 15A to 15C of the Company Directors Disqualification Act 1986.
The Insolvency Service can apply to the court for a compensation order on behalf of the Secretary of State for Business and Trade. Before an order can be made, the director must already be subject to a disqualification order or a disqualification undertaking.
- The claim must relate to the conduct for which the director was disqualified. That conduct must have caused quantifiable loss to one or more creditors of a company that entered formal insolvency proceedings or was dissolved.
- This means that disqualification alone is insufficient. There must be a connection between the particular conduct recorded in the disqualification proceedings and the financial loss for which compensation is sought.
- For example, a director may have accepted an undertaking containing several allegations. A compensation claim should not simply treat every company debt as a loss caused by those allegations. The Insolvency Service must identify the relevant conduct, the affected creditor or class of creditors and the loss said to have resulted from that conduct.
- The wording of a disqualification undertaking can therefore have consequences beyond the director ban itself. A director who accepts allegations without considering their potential financial implications may later find that the same wording is relied upon in support of a compensation claim.
The application must generally be made within two years of the disqualification. Compensation can only be sought in respect of relevant conduct occurring on or after 1 October 2015, when the compensation provisions came into force.
The regime was later extended to include directors of dissolved companies. This allows conduct involving a dissolved company to be considered even where the company did not enter liquidation or administration.
A compensation order is separate from a misfeasance claim against a director. A misfeasance claim will usually be brought by a liquidator or administrator on behalf of the company. A compensation order application is brought by the Secretary of State following director disqualification.
How is the amount of director compensation calculated?
The starting point is the loss caused by the conduct for which the director was disqualified.
The Insolvency Service’s guidance states that the calculation may consider whether the conduct caused an identifiable loss, which creditors were affected, whether their losses can be quantified and whether they have received or are likely to receive a material repayment through the insolvency process.
This is important because the amount owed by an insolvent company is not necessarily the same as the compensation payable by a director.
A company may have failed for several reasons. Market conditions, trading losses, customer defaults and other management decisions may all have contributed to the overall deficiency. A compensation claim should focus on the additional or identifiable loss caused by the conduct forming the basis of the disqualification.
Causation may therefore be a significant issue. A director may need to consider whether the alleged conduct actually caused the creditor’s loss, whether that loss would have arisen in any event and whether the calculation takes account of amounts already recovered.
The position of individual creditors may also differ. Conduct may have caused direct loss to one creditor or a particular class of creditors without causing the entire deficiency suffered by the company’s creditor body.
The Insolvency Service will consider whether another financial contribution has already been made. Its guidance indicates that a compensation claim is unlikely where an insolvency practitioner has brought or intends to bring civil recovery proceedings concerning the same conduct, or where the director has already made a suitable contribution to the company’s assets.
This is intended to reduce the risk of overlapping recovery for the same loss. It does not necessarily prevent different claims where they concern different conduct, different losses or different legal duties.
Compensation can be paid to the Secretary of State for distribution to a particular creditor or class of creditors. It can also be paid as a contribution to the assets of the insolvent or dissolved company.
What is a director compensation undertaking?
A compensation undertaking is a voluntary agreement by a director to pay compensation without requiring the court to determine a compensation order application.
It is separate from the undertaking by which the director agreed to be disqualified. A director may therefore be subject to both a disqualification undertaking and a later compensation undertaking.
Once accepted by the Secretary of State, a compensation undertaking has the same effect as a court order. It can only be amended by the court.
An undertaking can be offered before court proceedings are issued. Where it is accepted at that stage, the Insolvency Service’s guidance states that it will not seek to recover its costs of the compensation action from the director.
An undertaking can also be offered after proceedings have started. This may bring the proceedings to an end, but the director could be required to pay the costs and expenses incurred up to that point.
Agreeing an undertaking may provide greater certainty and avoid the cost of contested proceedings. However, it should not be treated as an administrative formality.
Before agreeing, the director should understand the conduct relied upon, the basis of the loss calculation, who will receive the money and whether the proposed payment reflects other recoveries or contributions.
The director should also consider their ability to comply with the undertaking. Accepting an unaffordable obligation may create further financial and enforcement problems without properly resolving the underlying dispute.
What should a director do if compensation is being sought?
The director should first identify the exact conduct relied upon. It should correspond with the conduct for which the director was disqualified rather than introducing a separate allegation that did not form part of the order or undertaking.
The proposed loss calculation should then be examined. Relevant questions may include which creditors are said to have suffered loss, how the amount has been calculated, whether the conduct caused that loss and what payments have already been received through the insolvency process.
The director should preserve and review any records relevant to the calculation. These might include company accounts, bank records, creditor statements, insolvency reports, settlement documents and evidence of payments made to the company or its creditors.
Where a liquidator or administrator has already brought a claim, the relationship between the two proceedings must be considered carefully. The same underlying events may be relevant to both claims, but the parties, legal tests and recoveries may differ.
The Insolvency Service states that directors will be notified when a final decision has been made to seek compensation. If no agreement is reached, the Secretary of State may start court proceedings. The director can respond to the issues raised, and the court may refuse an order, change the amount or determine who should benefit from the compensation.
New evidence can be considered throughout the process. Proceedings may be discontinued where they are no longer considered to be in the public interest.
A director who is still considering whether to accept a disqualification undertaking should address compensation risk before finalising the wording. Our director disqualification guide explains the wider consequences that may follow an undertaking or court order.
Receiving a proposed compensation claim does not mean that the amount sought must be accepted. The legal and factual basis of the claim can be reviewed, evidence can be provided and the calculation can be challenged where appropriate.
Francis Wilks & Jones advises directors in England and Wales on compensation investigations, compensation undertakings and court applications. We can help assess the conduct relied upon, the alleged creditor loss and the relationship between the claim and any existing insolvency proceedings.
We have been defending directors since 2002. Let us help you too. Call for a private consultation today.
