Financial Penalties for Disqualified Directors

The rules relating to Directors Disqualification changed substantially on 1 October 2015.

Prior to that date the Insolvency Service were required to issue disqualification proceedings against directors within two years of the date their companies entered a relevant insolvency process. In addition, directors were not liable to a financial penalty by virtue of the disqualification proceedings alone.

From 1 October 2015, the Insolvency Service now has up to three years to bring proceedings and in addition, in the event that a director is disqualified, he is potentially liable to a financial penalty in respect of any loss creditors have suffered as the result of any wrongdoing by the director that occurred from 1 October 2015 onwards. The mechanism is the making of an application for a Compensation Order or Undertaking and this must be made within two years of the disqualification order or undertaking being made or accepted.

It is however not completely clear where the money ultimately goes. It can be ordered to be paid to the Secretary of State for Business, Innovation and Skills for the benefit of specified creditors or classes of creditors, or as a contribution to the assets of the insolvency company.

Now, let’s take a realistic look at this:

If disqualification proceedings are commenced towards the end of year three, it may well be a year or more before any disqualification order or undertaking is obtained, so by that time, the insolvency process will be four years old. There is then a two year window within which an application may be made for a Compensation Order.

It is conceivable therefore that six years or more could elapse before any recovery is made from the director.

Insolvency Practitioners are in business and like all business people they need to make a profit to live. They are also heavily regulated and among other things have to be seen to be progressing cases as swiftly as possible and if there is nothing more to be done, they are expected to close cases quickly. In many cases an insolvency practitioner will have completed his work in much less than three years from the date of commencement and in small cases this will have been achieved in less than a year. It is unlikely therefore that he will keep a case open for another three years or more on the off-chance that a director will be disqualified and will also be liable to a penalty as the result of proceedings over which he has no control.

There is a danger therefore that in protracted disqualification cases, the administration of the insolvency could well have been completed before the disqualification takes place. If a Compensation Order or Undertaking is then pursued, by the time that process is completed, the company itself could have been dissolved. In such cases, an order for the amount recovered to be contributed to the assets of the company would be of no value to creditors, since under the Bona Vacantia rules, the money would revert to the Crown.

Similarly, after a lengthy lapse of time, how many of the company’s creditors will still be in existence at the time the funds are recovered? The Crown will be there, for sure, but what about the businesses that failed because they were not paid in the first place?

Clearly it is going to be a while before the effects of this change are known and time will tell whether it will result in greater recoveries for creditors or whether it will act as a deterrent to delinquent directors.

© J D Travers 2006-2017