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Compensation from Disqualified Directors

Compensation from Disqualified Directors

13 November 2019: The Company Directors Disqualification Act 1986, a staple of the insolvency world which may not be widely recognised outside of it, was amended via legislation coming into force on 1 October 2015, later supported by the Disqualified Directors Compensation Order which came into effect on 30 November 2016. I am sure the titles of the relevant legislation will give a clue as to what matters they address.

In a nutshell, the amendments and new legislation allow for compensation orders to be made against company directors who were disqualified due to their misconduct in office. No doubt many people will find this a fairly reasonable means of punishing errant directors. However, the amendments have wider implications due to their possible intersection and (potential) disruption of actions that can be taken against a director by an appointed insolvency practitioner.

In light of a judgement made on 1 November 2019, the first of its kind, it would appear within the framework of this separate legislation the priorities of distribution of funds to classes of creditors as defined within the insolvency legislation are not applicable. In this instance compensation is to be paid to 28 customers/creditors of the company, with a further (and lesser) sum payable pro rota to the general body of creditors of the liquidation estate. This is a point that may be of concern for those that currently have enhanced status over unsecured creditors such as employees, secured lenders and, as of next April, HM Revenue & Customs.

However, the wider point to make is that under this separate legislation, essentially funded by government pockets, a lack of case funds and/or litigation funding may no longer be prohibitive to actions being taken against directors, so long as their misconduct is sufficient to cause them to be disqualified. Therefore, providing the Insolvency Service with an additional string to their legislative bow when dealing with directors and their misconduct.

BRI regularly assists companies in distress with regards to giving guidance relating to the conduct of directors if insolvency has been encountered. Should you or your clients have any concerns regarding the potential implications for directors please do not hesitate to contact us.

Should you wish to read the judgement in full, please use the following link - https://www.bailii.org/ew/cases/EWHC/Ch/2019/2806.html