2016 insolvency changes: directors' disqualification

Keith Tully considers how amendments to the Company Directors Disqualification Act 1986 affects directors who have been disqualified for wrongful or unlawful trading.

New legislation laid down in the Small Business, Enterprise and Employment Act 2015 has now come into force and involves changes to the directors’ disqualification regime.

Among several other amendments to the Company Directors Disqualification Act 1986, courts now have the power to make compensation orders against directors who have been disqualified for wrongful or unlawful trading.

This new power has been granted to ensure accountability for director actions if one or more creditors has suffered identifiable loss as a result of misconduct. It is hoped that the new measure will bring greater transparency and improved confidence to the insolvency system as a whole.

Removing the ‘veil of incorporation’

A common perception by creditors of a failed company is that directors can avoid responsibility for their company’s debt via a ‘veil of incorporation’. This is not a get-out clause, however, and is in reality removed when wrongdoing is suspected.

Directors are in danger of becoming personally liable for company debt at any stage during their time in office, whether or not their wrongful actions are deliberate, or mistakenly taken in good faith.

Compensation undertakings

When a director has been disqualified, the secretary of state has two years from the date of the disqualification order or undertaking to apply for a compensation order. When added to the recently extended three-year time limit for disqualification, this is a lengthy period for directors to await their fate.

An alternative option is the provision of a ‘compensation undertaking’, which would bring the matter to a close without having to wait for a decision. This involves making a one-off payment to the secretary of state as compensation to the creditor or group of creditors involved.

No court orders are needed, and the payment is passed directly to the creditors. Directors can move on without worrying further about the consequences of their actions in office.

How is the amount of compensation calculated?

A range of issues are taken into account when calculating the level of compensation to be paid. These include:

  • Whether or not the creditor(s) in question has already received any form of payment from the insolvent company or individual directors.
  • The level of loss suffered by the creditor(s).
  • Specific circumstances surrounding the director’s disqualification – whether they traded illegally, tried to avoid responsibility at any stage, were cooperative during the insolvency phase, and their attitude towards the company’s creditors.

This amendment to the Company Directors Disqualification Act takes account of director conduct from 1 October 2015 onwards. Signing a disqualification undertaking could now lead to further financial claims against a director.

Intended to deter misconduct as a director, and bolster public confidence in the system, the introduction of compensation orders is a serious threat to company directors’ personal finances and reinforces the need for all directors to adhere to their legal requirements when operating a UK company.

About the author

Keith Tully is a partner at Real Business Rescue, part of the Begbies Traynor Group. Keith is a well-respected company rescue expert with over 20 years' experience advising business owners and stakeholders, including areas such as director disqualification.

See also: Are you ready for 2016 insolvency changes?