Small Business, Enterprise and Employment Act 2015 Compensation Orders

Compensation Orders following disqualification – COMMENCEMENT ORDER TO BE ANNOUNCED

This is part of a series of posts on the Small Business, Enterprise & Employment Billthat has now come into force on 26 March 2015 following the grant of Royal Assent and is now the Small Business, Enterprise and Employment Act 2015 (“the Act”).

This series of posts is intended to update the readers of the key changes, which should radically transform the transparency of the marketplace as regards the operation, control, ownership and risk associated to limited companies in the UK.

We have not addressed all of the issues described in our previous posts, to avoid duplication, but would welcome any queries from the reader in this respect.

The commencement of these changes is different dependant on which part of the Act is being reviewed (Section 164 of the Act defines commencement) and we have highlighted below the relevant commencement dates. Where we below stated “to be announced” this means it has not yet come into force and will commence upon the making of a Commencement Order.

The changes as set out below will be extremely important to all directors, companies and individuals with business in the future and it cannot be emphasised too strongly how important it is that you are prepared for these proposed changes. At Francis Wilks & Jones we can advise on all matters subject to these posts.

At Section 110 of the Act is a further consequence for directors of insolvent companies. This inserts Section 15A into the Company Directors Disqualification Act 1986 andprovides that, upon the application of the Secretary of State, the Court to make a Compensation Order against a disqualified director provided such misconduct, “has caused loss to one or more creditors of an insolvent company”.

The prime situation where this is likely to occur is where HMRC have not been paid or has been paid less. The amount payable under the compensation order is referable to the directors’ conduct and the quantum of the loss which, without any further restriction, could make this an extremely severe penalty for directors who are liable by reference to their failure to control the wrongdoing director (for example non-executive and spouse directors who may otherwise have had limited involvement in the company).

The limitation period for an application for a Compensation Order is 2 years from the date the disqualification order was made or the date when a disqualification undertaking is accepted.

This will have the dual affect of disincentivizing people to offer a disqualification undertaking (unless these can be linked to an agreed order for compensation) and will lead to the disqualification consequences potentially surviving insolvency by up to 5 years.

Faced with disqualification proceedings, as a result of these changes it is now even more important to seek legal advice. At Francis Wilks & Jones we can advise on all of these risks.

Compensation Orders Following Disqualification

This is part of a series of blogs on the Small Business, Enterprise & Employment Bill (“the Bill”) that is proposed to come into force in April 2015.

A further proposal within the Bll is the power of the Court to make a Compensation Order following the disqualification of a director, whether by Court order or upon providing a disqualification undertaking. It is also proposed that a director could offer a compensation undertaking, in a similar manner as disqualification undertakings are currently offered by former directors.

This compensation regime, which annexes to the disqualification regime, will provide added complications for directors, who in a large number of circumstances have suffered together with the failure of the company either in respect of their own capital investment or alternatively as a result of guarantees they provided or charges over properties they own.

Should a compensation undertaking not be offered, then the Secretary of State may apply for a compensation order within 2 years from the date when the disqualification order was made or within 2 years from the date when the disqualification undertaking was accepted.

It is not uncommon for a former director to face bankruptcy proceedings as a result of their company’s failure and the introduction of applications for compensation orders may lead to further, or post bankruptcy, liabilities.

Accordingly, as a result of the various changes proposed, directors of insolvent companies could be bearing the consequences of failure for up to 9 years following the commencement of the insolvency proceedings.

At Francis Wilks & Jones we can advise on all of these risks.