Potential Risks for Directors – Recent Changes in the Director Disqualification Regime

The Insolvency Service has recently announced its intention to begin disqualification proceedings in the High Court against the former directors of Kids Company. The decision is a reminder for all directors to keep in mind recent changes in the director disqualification regime in England and Wales under the Small Business, Enterprise and Employment Act 2015.

The Insolvency Service (a Government agency sponsored by the Department for Business, Energy & Industrial Strategy) has the power to investigate companies or their directors if a complaint has been made about them or if the company has become insolvent.  If it believes that a director’s conduct is such that they are unfit to run a company, it can bring disqualification proceedings against the director. Such conduct includes allowing a company to continue trading when it can’t pay its debts or not keeping proper company accounting records. An individual can be disqualified for up to 15 years, during which time they cannot be a director of any company registered in the UK or an overseas company that has connections with the UK. Nor can that individual be involved in forming, running, or marketing a company. If an individual breaks the terms of the disqualification, they can be fined or imprisoned for up to two years.

Some significant developments by virtue of the Small Business, Enterprise and Employment Act 2015 include (i) the implementation of compensation orders against individuals which could be for the benefit of creditors or as a contribution to the assets of the company, (ii) giving the Court the power to examine a wider range of conduct to establish whether a director should be disqualified, (iii) potential disqualification of persons in England and Wales if they have been convicted of a company related offence overseas, and (iv) the extension of the time allowed for an application to be made by the Insolvency Service for a director disqualification order from two to three years from the date of the insolvency.

Hannah Blom-Cooper, a Legal Director in the Fraud Defence Group at Mishcon de Reya, says:

“The recent introduction of compensation orders now means that a disqualified director may have an additional liability for compensation over and above the potential direct claims of liquidators and creditors. The Court will only consider a director’s conduct after 1 October 2015. So, as the cases work their way through the system, it will be interesting to see how the Courts and Insolvency Service approach compensation orders, and in particular, what impact, if any, they have on the investigations of a liquidator challenging antecedent transactions which fall foul of the provisions of the Insolvency Act 1986.”

Jo Rickards, a Partner in the Business Crime Group at Mishcon de Reya, added:

“Extending the scope of director disqualification regime is a further burden on directors, leaving them in limbo for three years before they know if proceedings are going to be started against them. In practice, this will allow the Insolvency Service to carry out a more detailed investigation into a director’s conduct and to present a more robust claim to the Court. It is also likely to mean a higher number of investigations are taken on in the future.”