More Bad News for Directors and their Personal Liability

This is the next in the series of blogs for the Directors’ Friend.

A director of a company that has been placed in to formal insolvency may receive an enquiry letter perhaps enclosing a Directors Questionnaire from the Insolvency Service.  They may also receive a letter being a notice under Section 16 of The Company Directors Disqualification Act 1986 (“CDDA”) notifying of the intention of the Secretary for State for Business, Energy & Industrial Strategy (that is the Insolvency Service) (“SOS”) to commence director disqualification proceedings against you.

WHAT SHOULD YOU DO?

Do not ignore the letter.  As the consequences for you could be limiting and expensive!

You could consider offering a disqualification Undertaking to be disqualified in order to avoid going to Court or possibly fight the case in Court.  It is inadvisable to do anything without the benefit of specialist legal advice in any event.

Now that is even more the case – Why?

DIRECTOR DISQUALIFICATION AND DISQUALIFICATION ORDERS AND UNDERTAKINGS

In brief, there has been a recent change in the law that is completely new by way of Section 110 of the Small Business, Enterprise and Employment Act 2015 (“SBEEA”) which now allows the Court to make a compensation order against a disqualified director where it appears to the SOS that certain conditions in new Section 15(A)(3) of the CDDA are met in that:

“(a)      the person is subject to a disqualification order or disqualification undertaking under [the SBEEA] and

 (b)        conduct for which the person is subject to the order or undertaking has caused loss to one or more creditors of an insolvent company of which the person has at any time been a director.”

FOR THE BENEFIT OF:

Under new Section 15(B) the amounts payable under compensation orders and undertakings are to be for an amount specified (in the order) to be paid to the SOS for the benefit of:

  1. A creditor or creditors specified in the order;
  2. A class or classes of creditors so specified.

This is as a contribution to the assets of the company:

A compensation undertaking (pursuant to Section 15(b)(2)) is for the same but with an out of court settlement with the SOS.

COMMENTS:

  • This is a new law and an entirely new area of law whereby the SOS in the context of director disqualification is seeking to claim compensation for the benefit of creditors or classes of creditors from the disqualified director.
  • This is an additional statutory power in addition to the powers available to liquidators of companies in liquidation, for example under the Insolvency Act 1986 to include for:
  1. Misfeasance (Section 212);
  2. Transactions at an Undervalue (Section 238);
  3. Preferences (Section 239);
  4. Wrongful trading (Section 214);
  5. Fraudulent trading (Section 213); and
  6. Transactions defrauding creditors (Section 423)

which are other statutory claims by which the liquidator as office holder can seek to recover assets for the benefit of the insolvent estate.

  • It strikes me that there are all sorts of issues to be raised in terms of disputing the conduct and/or resisting the application on the basis of, for example, remoteness of loss and causation of loss. These are applicable in, for example, Misfeasance proceedings.  It would appear to me that they would surely have equal relevance in these compensation proceedings.
  • It is likely in my view that the driving force is to make recoveries for the Exchequer in circumstances where a large number, if not the majority of the director disqualification proceedings brought are, in my experience, for trading to the detriment of the Crown and/or a failure to pay the Crown debt.  The compensation regime would appear to be a vehicle to primarily compensate HM Revenue and Customs, but the SOS’s approach remains to be seen. For example, how far is the SOS likely to interrogate a proof of debt lodged?

OTHER CLAIMS AND EXPOSURE BY THE DIRECTORS:

It would be of concern to the well advised director that any successful recovery by the SOS in compensation proceedings may lead to other claims (as above) being brought by the liquidator of the company.

The office holder is obliged to seek and retain any recoveries on behalf of all of the creditors of the insolvent estate of the company (subject to costs) and it would appear at present that the SOS is only obliged to make recoveries for specific identified creditors who have suffered losses.  It would therefore appear to be a tension between the office holder and the SOS bringing these financial recovery proceedings.

PARALLEL CLAIMS BEING FACED BY THE DIRECTOR:

It would seem very unfair and unlikely that any court would allow both the SOS and an office holder such as a liquidator to bring proceedings against a director based upon the same facts and circumstances.  In other words at risk of having to pay twice for the same offending (mis)conduct.

SUMMARY:

It is therefore the case that the well advised director seeks and obtains advice at an early a stage as possible when the SOS first make enquiries.

With the new compensation orders regime running in parallel with director disqualification proceedings the financial risk and exposure of the directors has now increased.

It remains to be seen how the tension between compensation claims brought by the SOS and the office holder will be resolved with the director in the middle.

WHAT TO DO NOW?

If you are faced with a claim for director disqualification or a liquidator has sent you a letter before claim please talk to me today.  That is in order to protect your position without delay.  The earlier that you speak with me the more that I can help.  Why not call me today on 01992 558411 and speak to me without obligation, pressure or cost.

If you are happy to instruct me my firm and I are happy to talk to you about fixed fees or staged fees that are agreed with you in advance of any work being carried out.  Your work will be carried out by me or others under my close supervision.  Finally, I am happy to come to you to take instructions.

In February / March 2017 I am intending to give a seminar on this topic. Details to follow.

Until the next time…

THE DIRECTORS FRIEND

 

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