Directors Disqualification : Compensation Orders

Major changes were introduced in 2015 to the law on Company Directors Disqualification. Amongst the changes introduced by the Small Business Enterprise and Employment Act 2015 (“SBEE”), the courts were given the power to make a Compensation Order against an individual who has already been disqualified as a director under the Company Directors Disqualification Act 1986 (CDDA) by a court order or having given an undertaking.

Under the new rules the Secretary of State for Business, Energy and industrial Strategy (BEIS) has 2 years from the date of the disqualification order or undertaking to apply to court for Compensation Order. When this period is added to the extended limitation period of 3 years from the date of Liquidation / Administration for the Secretary of State to bring the disqualification proceedings in the first place, it means that directors of failed companies will have a long period of time (post insolvency) in which they can be pursued by the Secretary of State (acting through the Insolvency Service) for compensation to creditor(s).

When calculating the level of compensation to be paid to the Secretary of State for creditor(s) the issues that the court will take into account are:

  • The losses suffered by the creditor(s)
  • The facts surrounding the director’s disqualification – the nature of the misconduct resulting in their disqualification, their co-operation or lack of co-operation with the Liquidator in his investigations and their attitude to the company’s creditor(s).
  • How much (if any) payment the creditors have already received from the insolvency.

Directors subject to application for compensation orders will also be able to give compensation undertakings (settling the proceedings) to avoid lengthy court proceedings.

The basis of these Compensation Orders will be the director’s conduct only after 1st October 2015 and therefore the first tranche of these claims for compensation are likely to be commenced over the next few years. Only then will the full impact of these changes (which aim to punish directors of failed companies and provide financial recourse for creditors left high and dry following insolvency) become apparent.

Eleanor Richards has extensive experience of both taking and defending Directors Disqualification proceedings for clients.

For further enquiries please contact her on 01903 228211.

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