A compulsory liquidation has always been an extremely serious situation for a company director to be in.
Not only does it mean the company and its assets will be liquidated, but the director will also face an investigation into the reasons why the company became insolvent.
If the investigation reveals any incidences of wrongful trading or unfit conduct on behalf of the director/owner, they could face a director disqualification of up to 15 years and be made liable for a proportion of the company’s debts.
An amendment to the Directors Disqualification Act
And if that prospect wasn’t daunting enough, now the fallout of a compulsory liquidation could be more serious than ever before. An amendment has been made to the Company Directors Disqualification Act which gives courts the power to make compensation orders against directors who have been disqualified for wrongful or unlawful trading. This means a compulsory liquidation could now lead to further financial claims against a director.
Compensation Orders are an Additional Deterrent Against Misconduct
The amendment to the disqualification rules came into effect from 1 October 2015 onwards. Any examples of unfit conduct that occur after this time and result in a director disqualification could also prompt creditor compensation claims. This provides a further deterrent to company directors and aims to bolster public confidence in the UK’s insolvency regime.
This new power also ensures directors are made accountable for their actions if one or more creditors suffer an identifiable loss as a result of misconduct. It poses a serious threat to directors who have had the company’s creditors, the Crown, or a government agency liquidate the limited company. It also reinforces the need for directors to understand and adhere to their legal obligations when operating a UK company.
How are the Compensation Undertakings Applied?
If you have received a winding-up petition from an angry creditor or HMRC, your company has seven days to respond before court issues a winding-up order to shut down your company. If you want to save your business, it is essential you respond to the winding-up petition immediately.
If you do not wish to negotiate a rescue deal or defend the company against the winding-up petition in court, the company will be closed, and your conduct as a director will be investigated. The official receiver or liquidator will then send their report to the Secretary of State.
It is the Secretary of State’s job to determine whether a director should be disqualified and for how long. The Secretary of State then has an additional two years from the date of the disqualification order or undertaking to apply for a compensation order.
Alternatively, if the disqualified director would prefer to bring the matter to a close rather than waiting up to two years for a decision on compensation to be made, they can make a ‘compensation undertaking’. In this case, a one-off payment would need to be made to the Secretary of State on behalf of the creditor(s) involved.
How much Compensation will Disqualified Directors have to pay?
There are some different issues that will be taken into account when calculating the amount of compensation to be paid. This includes:
• The level of loss suffered by the creditor(s);
• Whether the creditor(s) in question received any payout from the liquidation of the company or individual directors;
• The circumstances surrounding the director’s disqualification i.e. their level of cooperation during the liquidation process, their attitude towards company creditors and the acts that led to the disqualification in the first place.
Do You Need Help with a Director’s Disqualification Compensation Order?
At Company Debt, we can help you find the best alternative to the compulsory liquidation of your business. If a compulsory liquidation is unavoidable, we can help you protect the assets of the business, comply with the liquidators and act responsibly throughout. For a confidential, no-obligation discussion of your circumstances, please get in touch today.