Director's Disqualification: What directors need to know

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Director's Disqualification: What directors need to know

Director's Disqualification: What directors need to know

The disqualification regime for directors changed in October 2015. The net for catching delinquent directors was widened, and the scope of the regime extended and new provisions were introduced to tighten up the rules in a number of areas, including:

  • the introduction of compensation awards against disqualified directors
  • the assignment of actions by the liquidators
  • matters to be taken into account in determining fitness of a director
  • directors’ accountability for misconduct overseas

This article looks at a few of those changes, which were introduced to restore public confidence in the system.

Compensation orders

Compensation orders are a new concept in our law. They allow the Court to order compensation to be paid directly to creditors by directors. The new rules give the Court the power to order a disqualified director to make a compensation payment to creditors where their conduct has caused losses to the creditors (over and above any claim a company has against the director and / or other claims the liquidator / administrator may have).

The conditions for a compensation order that:

  • The director must have a disqualification order made against them (or have given a disqualification undertaking)
  • Their conduct must have caused loss to one or more creditors of an insolvent company

This means that a disqualification order (or undertaking) is not the end of the legal action against the director. A director who gives a disqualification undertaking, or has a disqualification order against them, faces the risk of a compensation order as well.

Directors with disqualification claims against them therefore need to take into account the risk of a compensation order before providing undertakings without dealing with the issue of compensation at the same time. We advise that directors in such a situation should seek legal advice as soon as they become aware of a potential investigation by the Insolvency Service.

Assignment of claims

Further measures aimed at promoting accountability and improving returns to creditors included: Giving administrators (as well as liquidators) the power to pursue wrongful trading and fraudulent trading claims; and allowing office holders to assign their claims to 3rd parties. Thus, for example, allowing a creditor to buy the claim and pursue it themselves.

Updated matters to be taken into account when pursuing disqualification

When assessing whether to pursue disqualification claims the factors that will be considered include matters such as:

  • Breaches of any laws, including foreign laws
  • Responsibility for any other company's insolvency, or the insolvency of a company based overseas
  • Any loss or potential harm to the company caused by that conduct

Previously, a person who has been disqualified as a director overseas (or convicted of a relevant criminal offence in connection with a company overseas) was not prevented from acting as a director of a UK company. As of 1 October 2015, the Courts can now take overseas misconduct into account when deciding whether or not to disqualify a director in the UK; and has the power to disqualify an individual from acting as a director in the UK if they have been convicted of a relevant criminal offence in connection with a company overseas.

If you would like further information on this topic please contact Kam O'Neill, or you can give us a call on 0345 070 6000.