Making directors liable

24th March 2022

There has been widespread criticism of some of the schemes introduced by the Government for the purposes of supporting companies financially during the pandemic, particularly in relation to the lack of adequate checks and balances. These failings enabled a number of company directors to abuse some of those schemes, siphoning off monies for their own benefit, often at the expense of creditors.

Proceedings against Directors

It is clear from the reports published from time to time by The Insolvency Service that it is now seeking to sanction that behaviour by bringing proceedings against a number of directors involved in those abuses under the Directors’ Disqualification Act. As a result, a number of directors are no longer able to act as such.

However, this does not, by itself, lead to the recovery of any of those monies that have been spent on, amongst other things, holidays, new cars and houses. Where HMRC, for example, has lost out as a result of such conduct the reality is that the taxpayer picks up the bill.

The Business Secretary does have the power, under Section 15A of that Act, to ask the Court to order a director to pay compensation where he has obtained either a disqualification order or undertaking and the company involved has either entered into a formal insolvency process or been dissolved.

Compensation orders

To date I have not found any evidence that a compensation order has been made. Regrettably, there are no statistics available to show whether any compensation orders have been obtained since the ability to apply for one was introduced in 2015. The Insolvency Service Enforcement Outcomes published on its website makes no reference to them.

Whether or not the Business Secretary is going to apply for a compensation order is decided on the basis of whether or not it is in the public interest to do so. The guidance last updated in December 2016 only says that it is unlikely that an order would be sought if an insolvency practitioner has, or is likely, to take proceedings against a director or a director who makes a voluntary contribution to the assets of a company in a formal insolvency process.

Consequently, the onus is being put on the insolvency practitioner to take action.

More often than not in my experience, the insolvency practitioner has little, if anything, to fund a claim with. They are then having to look to some form of third party funding, possibly from the creditors themselves, in order to bring a claim. If you happen to be a creditor that, like many, had to rely on government funding which you are due to repay, the present situation does seem to be adding insult to injury!

The Business Secretary does have a period of two years from the date on which he obtained an order/undertaking to seek a compensation order. Given that the order can specify which creditor, or creditors, are to benefit from such an order it is still possible, particularly as economic conditions change, that we will see more of these applications being made in the future unless the well-advised director agrees to a disqualification order being made or an undertaking given on the condition that no compensation order is applied for!

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