A ruling made by the UK’s Supreme Court is set to help creditors recover more of the money they are owed from liquidated companies. The decision, which is undoubtedly a victory for creditors, will have considerable implications for creditors in insolvencies where money is being withheld by directors or third parties.
Until now, creditors of insolvency companies were only likely to see a very small proportion of the debt repaid, if any, on the liquidation of a company. However, on October 1, all this changed with the introduction of a new service which provides compensation in insolvency cases where the directors have been disqualified for unfit conduct.
The changes give the court the power to order a disqualified director to pay compensation to those creditors who have lost out financially as a result of any unfit conduct that occurs after October 1 2015. The changes will not be retrospective for previous business failures.
What constitutes ‘unfit conduct’?
Director disqualifications are made by the court, or they can be entered into voluntarily if the director gives an undertaking to the Secretary of State. An undertaking is the administrative equivalent of a disqualification order, but is entered into without the need for court proceedings.
Those who become company directors are obliged to:
- Carry out their duties honestly and responsibly
- Ensure they comply with the law and the relevant regulations
- Exercise adequate skill and care in regard to the interests of the company’s creditors, shareholders, employees, and in some cases, the general public
A director disqualification is a powerful tool that can last for up to 15 years to protect the public from those who abuse the privilege of limited liability. Without court permission, the director is disqualified from acting as a director or taking part in the promotion, formation or management of a company or a limited liability partnership for the duration of the ban.
The court can make a disqualification order in the following circumstances:
- Wrongful trading (such as trading when insolvent)
- Unfit conduct in the promotion, formation, management or liquidation of a company
- Failure to comply with the filing requirements under the Companies Act legislation
- Breaches of competition law
- Following conviction for criminal offences related to the promotion, formation, management or liquidation of a company
A tightening of the current rules
Financial redress for creditors is just one of the ways in which the current director disqualification process is being strengthened. On 16 September 2015, Business Secretary Vince Cable announced further plans to ensure directors face “the strongest possible consequences” if they act improperly. This includes:
- Strengthening rules to give investors and creditors the confidence that rogue directors will be banned from running companies
- Helping creditors receive compensation if they suffer a loss from a director’s criminal or reckless behaviour
- Ensuring directors banned from running companies abroad cannot run British companies
- Extending the investigation time allowed for complex cases of director misconduct
- Introducing corporate behaviour training for banned directors who want to run a company in the UK again
As of 1 October 2015, the nature and extent of any harm and loss caused must also be considered when determining whether a disqualification is appropriate, and information from other regulators can also now be used for unfit conduct hearings in disqualification proceedings.
Commenting on the changes, Mr Cable said: “Government recognises that taking risks is an important part of business, and the failure of a company does not indicate misconduct on the part of the directors.
“However, at the same time there is a lack of confidence in the regime for dealing with directors’ misconduct through civil law, though where misconduct consists of criminal behaviour then criminal proceedings can be brought.”
The new rules are a clear warning shot across the bows of any errant director who continues to trade increasing debts with reckless behaviour – thankfully these directors are not in the majority.
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Written by: Mike Smith