Directors-Are-More-At-Risk-Under-New-Small-Business-Regulations

Directors Are More At Risk Under New Small Business Regulations

The Small Business, Enterprise and Employment Act (SBEE) got the green light from the Royal Assent on 26 March. Changes to insolvency laws are on the horizon, raising the stakes for company directors.

Three upcoming amendments may pose challenges for directors facing financial struggles:

  • Compensation Orders can be issued against disqualified directors on behalf of creditors who suffered material losses due to directorial actions.
  • The Act empowers administrators to take action against a director, extending to cases of fraudulent or wrongful trading, a privilege previously exclusive to liquidators.
  • Claims against directors are now transferable or assignable to third parties, such as suppliers, employees, and other stakeholders.

 

The introduction of compensation orders

The implementation of compensation orders through SBEE effectively modifies certain aspects of the legislation outlined in the Company Disqualification Act, of 1986.

The Secretary of State will be empowered to issue a compensation order if the loss incurred due to directorial misconduct is identifiable and considered significant. The purpose of this provision is to establish a robust mechanism for creditors to be reimbursed when an administrator or liquidator opts not to pursue action against a disqualified director.

This is expected to lead to increased compensation for creditors and enhanced trust in the overall insolvency system.

 A two-year time limit will be in place after a director’s disqualification to initiate the compensation order, with various factors influencing the determination of the amount:

  • The nature/seriousness of the director’s misconduct
  • Amount of the loss sustained by the creditor
  • Whether any financial compensation has already been made by the disqualified director


Directors will have the choice to provide a compensation undertaking instead of facing a compensation order. This entails offering a specific amount as compensation to the creditor and submitting it to the Secretary of State.

 

Administrator action

SBEE grants administrators the authority to pursue legal action against a director for wrongful or fraudulent trading, a privilege previously exclusive to liquidators. The new law emphasises the need for company directors to stay vigilant about their financial standing and act responsibly. This involves prioritising creditor interests over their own or those of the company and shareholders if insolvency is suspected.

Pleading ignorance is not a valid defence; assuming the role of a director comes with specific legal responsibilities in this regard. Demonstrating that all possible steps were taken to minimise creditor losses, along with seeking professional advice, becomes essential when facing such allegations.

Before the recent change allowing administrator action, a company had to enter voluntary liquidation for such measures to be taken. The current regulation streamlines this process, placing the responsibility squarely on directors to align their conduct with the expectations of the office.

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Third party claims against directors 

The government’s objective to maximise returns for creditors has empowered liquidators and administrators to ‘transfer’ claims against directors who have acted unlawfully or caused substantial losses to creditors.

Assigning these claims to third parties is likely to result in increased actions against errant directors. Employees, suppliers, customers, or other stakeholders who feel aggrieved by financial losses might take the opportunity to pursue the matter, especially if the Insolvency Practitioner is unwilling or lacks the funds to do so.

The hesitancy of Insolvency Practitioners to take action often stems from the substantial evidence required for a successful claim and the risk of unrecoverable costs. However, even if an individual creditor shows no interest in taking action, a collective effort by a group of creditors could bring a case against the director(s), pooling both resources and motivation. 

If a solitary creditor is ready and financially capable of supporting the entire legal action, they would reap the complete award in case of success.

The amalgamation of these three amendments is anticipated to heighten the risks for directors who neglect to seek suitable professional advice.

Vanguard Insolvency is available to guide directors dealing with this scenario or those aiming to reduce the risk in the future.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.