Compensation Orders

Director Conduct Investigations

When a company enters liquidation or administration, the conduct of its directors, both past and present, may be reviewed by the Insolvency Service and the appointed liquidator or administrator. While each situation is unique, these reviews can potentially lead to disqualification proceedings against the directors.

Understanding Compensation Orders

The introduction of "Compensation Orders" through the Small Business, Enterprise and Employment Act 2015 brought a significant change to the disqualification process. It meant that directors disqualified by court order or those who provide a Director Disqualification Undertaking could be held liable for losses resulting from their actions or misconduct, regardless of whether these actions were deliberate, negligent, or accidental. 

This development has had a considerable impact on the entire disqualification process and how directors might approach it. It has changed the way Disqualification Undertakings are viewed and what was once seen as a risk-free way to for directors to conclude proceedings, now carries the potential for very real personal financial liabilities.

Disqualification Undertakings – Changes and Potential Risks

Before Compensation Orders were introduced in 2015, signing a Director Disqualification Undertaking was often a clear and cost-effective way for directors to resolve Disqualification proceedings with certainty and relatively quickly. 

However, since Compensation Orders came into effect, agreeing to a Director Disqualification Undertaking can now expose directors to personal financial liability, as they may be required to repay compensation for losses linked to their misconduct during the company's trading period. Given this shift, it's now even more vital for directors to seek legal advice, especially if a Compensation Order is a possibility, before making the decision to sign a Director Disqualification Undertaking.

Compensation Orders – Challenges in Defence

A key aspect of a Compensation Order is that, due to the legislation that introduced it, it operates under a principle of "strict liability." This means that once you, as the director, sign a Director Disqualification Undertaking, the basis for the Secretary of State to pursue a Compensation Order is essentially established as a consequence of the director's actions. 

It's therefore crucial to seek legal advice before agreeing to a Disqualification Undertaking, as once the agreement is signed, it can become very difficult to challenge a Compensation Order that is being sought.

Compensation order – what does it mean in practical terms

As a disqualified director subject to a Compensation Order, you become personally responsible for repaying losses that the Insolvency Service calculates the company incurred due to your conduct before its insolvency. Depending on the company involved, these losses could potentially be substantial. 

If you are unable to pay or agree on a repayment plan, the Insolvency Service may take legal action to recover the amounts owed. This action could lead to the loss of your assets, including potentially a portion of your home, or even bankruptcy.

Conclusion

The key message to take away is the importance of seeking legal advice as early as possible once you receive any indication, typically in the Section 16 letter, that legal action is being considered against you. This will ensure you have all the necessary information about the process and the options available to you right from the start, allowing you to make the most informed decision possible.

How our Restructuring & Insolvency team can help you

If you are a director and have concerns about your duties or are facing an investigation, it is crucial to seek legal advice immediately.  Please contact Richard Ludlow on 01732 496493 or by the enquiry form on this page.