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How Do Director Disqualification Compensation Orders Work?

The Director Disqualification regime for insolvent companies is intended to protect the public from Directors whose conduct is deemed to be unfit and the Director Disqualification Compensation Order is an extension of that system.

Director Disqualification Compensation Orders extended the consequences when a Director’s conduct in the management of a company had fallen below the standard that the Court considered to be fit such that they are not permitted to act as a Director for a period of time. They are from Section 110 of the Small Business, Enterprise and Employment Act 2015 which brought in Section 15A of the Company Directors Disqualification Act 1986 and started on 1 October 2015.

Whilst the Insolvency Service will typically be the government agency that will use its delegated powers from the Secretary of State to investigate the conduct of a Director that it thinks might warrant review and then apply for a Compensation Order if it feels it is just to do so, nevertheless it a Director Disqualification Compensation Order is an Order of the Court.

The effect of it is to render a Director personally liable for loss that it causes to a company if he or she is deemed to be guilty of misconduct such as misfeasance and or breaches of Directors Duties

Director Disqualification Compensation Order

What Is A Director Disqualification Compensation Undertaking?

A Director Disqualification Undertaking is an agreement between the Secretary of State and a Director for such a person to cease acting as a Director for a period of time. Such an Undertaking may include provision for compensation as well.

Note a Director Disqualification Undertaking does not involve the Court; it is agreed between the Director and the Secretary of State.

Purpose Of Director Disqualification Compensation Orders

The purpose of adding to the consequences of being disqualified as a Director compensation orders is to compensate creditors and in some cases possibly shareholders for the losses they have incurred from a Director’s deemed misconduct. 

What Is The Amount Of A Compensation Order?

The amount of compensation that such an Order that arises from Section 15B of the Company Director Disqualification Act 1986 is likely to be would relate directly to the losses caused.

The more serious the misconduct that gave rise to losses to creditors the more likely would be the potential for such proceedings to result in higher levels of compensation being sought.

It follows that upon a company going insolvent that the protection of company limited liability for a Director may be reduced. A Director who has complied with their duties will not be likely to suffer from a Director Disqualification Compensation Order.

Conditions For A Director Disqualification Order

Directors who have been the subject of a Director Disqualification Order or Director Disqualification Undertaking are capable of being caught by this legislation if their conduct has caused loss to one or more creditors of a company that has gone into an insolvency procedure or which has been dissolved as a company.

Limitation Period For Compensation Order Application

The Secretary of State can issue an application for a Director disqualification at anytime 3 years after the commencement of the insolvency process. 

A Director Disqualification Compensation Order can be applied for at anytime 2 years after the Director has been disqualified, either by way of a Court Order or a Disqualification Undertaking.

However, it is worth bearing in mind that if Director Disqualification Proceedings are issued by the Secretary of State then the time period can lengthen substantially. If there is a Trial then it might be some years later that the Order for disqualification is made and then a further two years can run before the limitation period for a compensation order runs out.

Why Give A Director Disqualification Undertaking?

In the UK most Directors are disqualified from acting for a period of time by their own agreement via the provision of a Director Disqualification Undertaking.

This is likely to arise because of the level of legal costs a Director may incur in seeking to defend such proceedings against the Secretary of State. However, it is worth bearing in mind that it is the terms of the Director Disqualification Undertaking or Order that may in effect open a Director up to the risk of a compensation order. Whilst in most cases a Director will not be disqualified due to a technical breach of the law that has not resulted in a loss to creditors, once an Order or Undertaking has been made the misconduct set out therein is deemed as fact and the Director’s negotiating position will likely deteriorate as a result.

Certainly, such legal fees can be expensive but the fact that it is the Secretary of State that is seeking a Director’s disqualification does not mean an Order will be made. Furthermore, the compensation order sought on the back of such an Undertaking could amount to a far greater sum than those legal fees. 

It is therefore a good idea to obtain professional advice. If you are advised that a compensation order is a serious risk then you may want to consider negotiating it at the point BEFORE you agree to give any Undertaking to bring matters to a swift conclusion and not have in effect two sets of proceedings. The expression killing two birds with one stone appears relevant.

What Options Are Available?

If a Director is being investigated by the Secretary of State in respect of allegations of misconduct then it is the risk of adverse findings that affect the risk of suffering a compensation order. 

A cost-benefit assessment of accepting a Disqualification Undertaking is a good idea as in some cases disqualification whilst unwelcome might not be too disruptive to some people. In cases where an Undertaking is preferred to going to Court negotiating both a disqualification and a Disqualification Compensation Undertaking may be a viable option.

A Director can potentially look to continue to act as a Director with the Court’s permission in light of Section 17 of the Company Directors Disqualification Act 1986 if their disqualification would be considered unfair and unjust. In particular, it is possible to obtain such permission when a Director can demonstrate that they have taken proper steps such as being monitored by professionals to ensure there is much less chance of any reoccurrence of the historic misconduct.

In some cases, the only option left is to contest the disqualification claim if an Undertaking has not been requested and or the Secretary of State will not negotiate a compensation agreement.

The Secretary of State still has to prove their case and convince the Court a Director should be removed from the limited liability business community for a period of time. There are well known instances when the Secretary of State’s application for a disqualification order failed such as the cases of Kids Company Directors Win and Fareak for example only. It is therefore not a foregone conclusion by any means as to the outcome for a Director pursued by the Secretary of State. In our article Director Disqualification Proceedings there is a section on What Can Go Wrong For The Insolvency Service? which explains such matters further.

Variation Of A Compensation Order

Under Section 15C of the Company Directors Disqualification Act 1986, a Director can seek to vary the level of compensation arising from an Undertaking. This is similar in substance to Section 8A of the Company Director Disqualification Act 1986, which allows a director subject to an Undertaking to reduce the period of disqualification.

However, this applies only to Undertakings, not Orders that are for compensation. If a Director considers the Order to be unjust then he or she would have to launch an Appeal instead. 

Are You A Director Under Investigation By The Insolvency Service?

If you are a Director under investigation by the Insolvency Service we would encourage you to seek independent professional advice as soon as possible.

Highlighted above is the potential risk that a Disqualification Undertaking can later result in a Compensation Order that whilst capable of being contested may leave a Director with less room for maneouvre and negotiating options.

It is possible to vary a Compensation Undertaking. Its effect is to ask the Court to examine the evidence in detail and it is the Director who now makes the application to Court and has to prove his or her case that a reduction is justified. If a company has retained poor books and records (which itself could be grounds for disqualification) then this may prove an additional hurdle to overcome.

This is a relatively new area of law that is still developing and whilst it may be possible to introduce arguments such as exceptional circumstances, not all the tests that might be applied by the Court are necessarily known. It may be the case that personal hardship and the ability to pay has no weight in these tests to be applied. We shall have to wait and see.

GET IN TOUCH FOR HELP

For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.

We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.

Author: Elliot Green
Last Updated: April 13, 2024

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Disclaimer: What Is A Director Disqualification Compensation Order?

This page is not legal advice and should not be relied upon as such. This article What Is A Director Disqualification Compensation Order? 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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