Do The Director Disqualification Compensation Order Rules Have Teeth?
Do Director Disqualification Compensation Order Rules Have Teeth? Well, Vince Cable, The Secretary of State for Business, Innovation and Skills as he then was on 16 July 2014 at the second reading of the Small Business, Enterprise and Employment Bill which subsequently became the Small Business, Enterprise and Employment Act 2015 appears to have intended this to be the case when said:
Many provisions that we will discuss are about enforcement, which in everyday language is what we mean by having teeth. When we get to the relevant sections, the hon. Gentleman will see that much of this Bill is about tough enforcement of regulation, not simply about creating rules for their own sake.
What Is The Company Director Disqualification Compensation Order Regime?
The Secretary of State has the power under Section 15A of the Company Director Disqualification Act 1986 when he or she considers a company Director has engaged in conduct that has caused loss to creditors to apply for a Company Director Disqualification Compensation Order.
A Freedom of Information Act request submitted by Oliver Elliot’s CEO, Elliot Green, unearthed information from the Insolvency Service relating to the performance of the Director Disqualification Compensation Order regime:
… the agency holds the information that you have requested and I have provided answers to your questions below in relation to the period between 01 November 2019 and 24 February 2023. Please note that the numbers are based on management information (as they are not currently included in the Official Statistics).
• Number of Compensation Orders – 1
• Number of Compensation Undertakings – 29
• Total quantum of Compensation Orders – £559,484.
• Total quantum of Compensation Undertakings – £573,723
In further response to the Freedom of Information Act request made, a response from Insolvency Service FOI dated 6 March 2023 highlighted that of the 30 cases, 29 were Undertakings of which 28 related to Covid-19 Finance. 1 case was misappropriation of assets and 1 case was transactions to the detriment of creditors. Only one case arose from a Court Order.
Proportion Of Insolvent Company Directors That Have Received A Compensation Order
In the period November 2019 until January 2023 based on an examination of data extracted from Monthly Insolvency Statistics, January 2023, there were on average 1,446 company insolvencies a month from a total number in that period of 56,395 for the UK. The yearly average in that period is 17,352 in the UK.
In data examined between 1995 and 2000 by Stephen Griffin, Reader in Law, University of Wolverhampton who wrote The Disqualification of Unfit Directors and the Protection of the Public Interest in the Northern Ireland Legal Quarterly [Vol. 53, No. 3], it was suggested that on average insolvent companies will have between 2 and 4 Directors.
It seems to follow if that is correct then 34,704 Directors a year are likely as a minimum to have been involved in insolvent companies. That has assumed the lowest average number of 2 Directors per insolvent company. This represents a monthly average of 2,892.
For the period 1 November 2019 to 31 January 2023, the total number of Directors to have been involved in insolvent companies would be 112,788. Therefore subject to those underlying assumptions it would appear the proportion of such Directors being subject to Director Disqualification Compensation Orders is running at around 0.0266%.
What Proportion Of Disqualified Directors Have Received A Compensation Order?
Based on the data extracted from Insolvency Service Enforcement Outcomes monthly data tables 2022/23 published 10 February 2023, it seems the average number of Directors disqualified appears to be currently running at roughly 1,024 a year.
For the period 1 November 2019 to 31 January 2023 there were 3,085 Directors disqualified. Therefore the rate of Director Disqualification Compensation Orders to disqualified Directors appears to be currently running at less than 1%.
Oliver Elliot Observations
At first glance, these figures suggest that the Director Disqualification Compensation Order regime might be lacking teeth. The numbers appear a bit thin on the ground.
However, an alternative argument might be capable of being constructed by those satisfied with the regime. Although we here struggle to endorse it, it cannot be summarily dismissed. It is the notion that a small amount of enforcement is all that is required to satisfy the legislation’s purpose with no need for a draconian approach.
Oliver Elliot is currently experiencing a considerable number of Directors enquiring about their personal risk when going into Liquidation if they are disqualified as a Director. A common question asked is Could I Lose My Home If My Company Goes Into Liquidation? or Could I Be Personally Liable For A Bounce Back Loan?. This might be the result of some significant government publicity of Directors pursued having taken out Bounce Back Loans and HMRC investigations into Bounce Back Loans.
Whilst the number of Director disqualifications has gone down in recent years as evidenced by data assembled in our article What Has Happened To The Director Disqualification Regime In 2022?, our recent enquiries suggest the public is conscious of the regime. Perhaps therefore a handful of compensation orders is sufficient to encourage better compliance.
At Oliver Elliot, we have some concerns with Director compensation orders/undertakings running at less than one per month over the last three years, that this was envisaged when Vince Cable debated this legislation and said its enforcement provisions were to:
… ensure that the UK continues to be regarded as a trusted and fair place in which to do business
It appears there has been historic academic research suggesting the Disqualification regime generally has not been a resounding success. For example only, Richard Williams’s thesis Delinquent directors: an analysis of the objectives and success of section 6 of the Company Directors Disqualification Act 1986 in which he concluded as follows:
The thesis concludes that the failure of disqualification to provide effective protection from the moral hazard created by limited liability ought to necessitate a review state’s policy of allowing free access to it. For, in so far as regulation exists to protect the public from abuse of limited liability, the state must feel that its policy creates losses that are unacceptable. Therefore the failure of that regulation ought to necessitate a review of the policy as the most desirable way of protecting the public from the harm inflicted by undesirable use of limited liability.
Conceivably the question is not does the Director Disqualification Compensation regime lack teeth but does is its enforcement lack bite.
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Disclaimer: Do The Director Disqualification Compensation Order Rules Have Teeth Or Are They Creatures Created For Their Own Sake?
This page is not legal advice and should not be relied upon as such. This article Do The Director Disqualification Compensation Order Rules Have Teeth Or Are They Creatures Created For Their Own Sake? is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.
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