Blog: delinquent directors face tougher sanctions

Directors who act inappropriately now face a tougher disqualification regime, as David Menzies explains.

Measures to strengthen the director misconduct regime were introduced on 1 October 2015. The measures are being introduced following proposals outlined in the government’s ‘Transparency and Trust’ consultation that took place in 2013/14. The measures place a strong emphasis on accountability of directors and have been introduced through the Small Business Enterprise and Employment Act 2015.

Director Disqualification

A package of measures are being introduced to further strengthen the director disqualification regime.

As part of the changes being introduced the matters that the Secretary of State or the court must take into account when considering whether a person should be disqualified has been made clearer. The matters will include breaches of laws or regulations, the loss or harm their conduct has caused and its frequency.

The scope of director disqualification will be extended to allow for the disqualification of a person who influences or instructs unfit directors. The Secretary of State and the courts will also gain the power to disqualify a person convicted of a company related offence abroad.

The period in which an action must be raised to apply to court for a director disqualification order against the director of an insolvent company has been increased from 2 years to 3 years. The scope of material available and ability to access information as part of director disqualification investigations by the Insolvency Service is also extended.

Compensation Orders

While existing provisions exist within the Insolvency Act 1986 which could require delinquent directors to repay an amount into the insolvent estate the financial risk to errant directors is to be extended through the creation of compensation orders and undertakings. This means that a disqualified director can be required to pay the amount of money creditors lost through his misconduct. Compensation can be sought for conduct that occurs on or after 1 October 2015.

Further measures to streamline reporting of director misconduct in insolvent companies will come into effect from April 2016 with the first of the new online conduct reports expected to be submitted in June 2016.

Although all of the above disqualification measures will come into force on 1 October, not all of them will have immediate effect. The table below summarises how the new measures will be implemented.

Measure

Will Affect

Disqualification following overseas convictions

Convictions after 1 October 2015 regardless of when the offence took place

Persons instructing a disqualified director

Instructions that give rise to conduct after 1 October 2015 that results in DQ

Broadening Schedule 1 CDDA

Conduct after 1 October 2015

Streamlined reporting of director misconduct in insolvent companies

Insolvencies after April 2016

Time Limits for instituting proceedings increased to 3 years

Insolvencies after 1 October 2015

Removing reference to “investigative material” in S8 CDDA

Conduct after 1 October 2015

Compensation Regime

Conduct after 1 October 2015

IPs powers and options extended

As well as the introduction of compensation orders, there are further measures aimed at promoting accountability and improving returns to creditors in corporate insolvencies. The power for an office-holder to bring fraudulent or wrongful trading actions is extended to administrators, previously such powers were available only in insolvent liquidations.

Office-holders will also be able to assign such actions, as well as rights of action for transactions at an undervalue/gratuitous alienations, preferences/unfair preferences and extortionate credit transactions.