New Legislation Could Bring an Increase in Director Disqualifications

With all the distraction caused by the shock election result, the Small Business, Enterprise and Employment Act 2015 has slipped largely under the radar. Here at Jameson, Smith & Co. we don’t miss a beat and are on hand to make sense of this new piece of legislation and look more closely at how the changes could affect you.

The Small Business, Enterprise and Employment Act 2015, was introduced by the former Secretary of State for Business, Innovation and Skills, Vince Cable. Passed in March, this multi-faceted act was part of the coalition government’s campaign against red tape and introduces changes to a number of areas including business finance, insolvency, corporate and property. A few of these changes will come into force later this month on 26 May, while the rest will require secondary legislation.

The rules as they stand

The provisions of this new act that caught our attention are the proposed changes to the Insolvency Act and the Company Directors’ Disqualification Act, which are expected to come into force in April 2016.

Under the current rules, company liquidators, administrators and insolvency practitioners are required to submit reports about the conduct of directors in company insolvencies to the Secretary of State, if it appears the directors are guilty of misconduct.

This is one requirement that can be overlooked by directors involved in a pre-pack administration who put their companies into administration before purchasing them back. However, they often fail to appreciate that in some cases the administrators appoint could file a report about their behaviour if they deem it to be unfit during the course of the administration.

The new provisions

The 2015 Act introduces a new provision which requires administrators and company liquidators to file a report about the behaviour of the directors in every company insolvency or company rescue case they handle, even if they do not believe the director’s conduct to be unfit. The result is expected to be an increase in the number of director disqualifications the courts hand down.

In further changes, a disqualification order against a director can currently only be sought within two years of a company entering liquidation. The 2015 Act will extend this period to three years.

There will also be an extension to the scope of the director disqualification rules, with punishments now handed down for misconduct relating to mismanagement and overseas convictions, and new powers to make disqualification orders against those who act to influence the conduct of already disqualified directors.

The final new provision relating to director disqualifications is the ability to make compensation orders against directors whose conduct has resulted in a loss to one or more creditors.

Other changes to the Insolvency Act

The other significant changes to the Insolvency Act 1986 resulting from the Small Business, Enterprise and Employment Act 2015, include:

  • Abolishing creditors’ meetings as the primary decision-making mechanism for insolvency procedures. This will be replaced with a deemed consent procedure, where decisions are considered to be made unless 10 percent of the insolvent company’s creditors object.
  • Giving administrators new powers to issue proceedings relating to wrongful or fraudulent trading.
  • Introducing a power to implement a restriction on sales to connected parties, including but not limited to pre-pack administrations. This change will be implemented by secondary legislation.

If your company is insolvent and you are unsure what action to take call 08000 746 757 to get free confidential advice.

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