Wednesday, 18 December 2019

Directors must count the cost of disqualification

Company directors who are disqualified could now find they face the extra penalty of paying compensation to creditors.

That’s the warning from Andrew Oranjuik, from Martin-Kaye Solicitors in Telford, Shrewsbury and Wolverhampton, who said changes in the law meant tougher judgements could be handed out.

“The law on the disqualification of company directors was changed in October 2016, and now we have seen the first ruling by the High Court under the new law which is a real wake-up call for bosses all over the UK.”

Mr Oranjuik said a compensation order could not be made unless the company where the person was a director was formally insolvent, usually through administration or liquidation.

“The director must either have been disqualified by the court or agreed to be disqualified, and this will only have taken place where the director has been involved in misconduct, committed an unlawful act, or has been found unfit to manage a company. And now, thanks to the change in the law, directors in this situation will be exposed to the extra risk of a compensation order if their conduct has caused a loss for the company’s creditors.”

Mr Oranjuik said the first case of its kind had involved a company director who had arranged for his company – prior to liquidation – to pay almost £560,000 to another company he owned, without any justification.

The court ruled that his actions had caused loss to the company’s creditors, and he had not taken any steps to try to repay the money. The liquidator did not have any funds to try to recoup any of the money from him either. So the court disqualified him for 15 years and ordered him to pay the entire amount back to the creditors.

“Before the change in the law, the director may not have faced action, but this case makes it clear that directors who act unlawfully at the expense of their creditors are now increasingly likely to face the risk of being held personally liable.

“Now that the courts can assess the loss to the creditors as part of disqualification cases, we expect to see a significant rise in the number of compensation orders being made, so it’s vital that directors are fully aware of their responsibilities and comply with the duties they are required to carry out.”