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.

Shadow Directors And Their Increased Responsibilities

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.

Section 251(2) of the Companies Act 2006 provides a definition of a shadow director of a company. A shadow director is not a director recognised on the Register of Directors in a company or listed as a director at Companies House, but nevertheless acts to instruct or direct directors in the management of the company and makes decisions critical to the company’s affairs.

Section 78(1) of the Bill seeks to incorporate a new Section 170(5) of the Companies Act 2006 such as to apply the duties of directors also to shadow directors. This is something that has been continuously present through the common law (especially in respect of proceedings brought for breach of fiduciary duties or misfeasance) but which now clarifies that shadow directors can be likewise personally liable for losses by the company.

Further, Section 93 of the Bill also provides that where a shadow director exercises a “requisite amount of influence” over a disqualified director, the shadow director may also be disqualified from acting as a director (with the appropriate criminal consequences for acting as a shadow director in the future as a result of the changes referred to in the last paragraph).

Quite often non-executive directors, either appointed or not appointed can fall into the category of shadow directors and thus any individual with influence over the company’s affairs may potentially be at risk as a result of this change. The proposed regulations do however make provision for professional advice and widens the exemption for professional advisers to ensure such individuals are not accidentally caught within these definitions.

Should you require further assistance or have concerns as to whether you may fall within the widened scope of the definition of shadow directors, with the consequential liability, or any other query in respect of the above matters please do not hesitate to contact Francis Wilks & Jones and we can assist with these matters.