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This publication is available at https://www.gov.uk/government/publications/director-disqualification-a-guide-to-compensation-orders/a-guide-to-compensation-orders
1. Compensation orders
Compensation orders aim to make directors financially account for the consequences of their unfit conduct.
The Insolvency Service can apply to the court for a compensation order on behalf of the Secretary of State for Business, Energy & Industrial Strategy. The court can make a compensation order if the director is subject to a disqualification order or undertaking and their conduct has caused a quantifiable loss to one or more creditors of an insolvent company.
The compensation order comes into force on the date it is made.
Compensation orders were introduced on 1 October 2015 by the Small Business, Enterprise and Employment Act 2015 which amended the Company Directors Disqualification Act 1986.
2. Compensation undertakings
A compensation undertaking can be entered into voluntarily without the need for court proceedings. Once accepted by the Secretary of State it has the same effect as a court order and can only be amended by the court.
Once a decision has been made to seek an order for compensation a director can offer to give an undertaking at any time before the matter has been brought before the court. The offer may be refused if it is determined inappropriate based on the information held against the director.
If an undertaking is accepted before court proceedings start then the Insolvency Service will not recover any costs of their investigation from that director.
Once court proceedings have started, a director may still offer to give an undertaking. This will stop the court proceedings, but the director may be required to pay the costs and expenses incurred in the proceedings up to the date of the undertaking.
A compensation undertaking comes into force on the date it is made.
It is important that a director obtains their own independent professional advice if they are uncertain whether they should offer an undertaking.
3. The role of the Insolvency Service
The Insolvency Service acts on behalf of the Secretary of State and decides whether it is in the public interest to seek a compensation order.
To preserve the integrity of this process, this decision making function is exercised by a separate department to that carrying out the disqualification and compensation investigation function.
Except where settled by undertaking, any application for a compensation order will be heard and decided by the court.
4. Time restrictions on seeking a compensation order
The application has to be within two years of the disqualification and compensation can only be sought for conduct that occurs on or after 1 October 2015.
5. Making a case for compensation
When deciding the amount of compensation it will be considered whether a director has made any other financial contribution in recompense for the conduct.
This means a case for compensation will unlikely be made where:
- an insolvency practitioner has taken or is going to take civil recovery action against the director
- the director has made a contribution to the assets of the company
6. Calculating quantifiable loss
The principles considered when calculating loss include:
- whether the disqualification conduct caused an identifiable loss to one or more creditors
- the nature of the creditors and whether they have other forms of redress
- the ability to readily identify the creditors affected and quantify the loss to each creditor (or class of creditors)
- whether through the insolvency process, for example liquidation, there has been or predicted to be a (material) repayment to those creditors
7. Informing a director that a compensation order is to be sought
Where the Insolvency Service is investigating the conduct of a director for a possible compensation order, best efforts will always be made to contact that individual as early as possible.
Where a final decision has been made to seek a compensation order, the director will be notified by post to the last known address. If the director does not respond or a compensation undertaking cannot be agreed then proceedings will be started at court. At this stage the director will be formally served with (sent) notice of the proceedings.
8. The court hearing
The proceedings are brought by the Secretary of State for Business, Energy & Industrial Strategy. The matter is heard, and decided by the court.
Directors have the opportunity to respond to the compensation issues raised and if they think the allegations are wrong, explain why they think that. The court might:
- disagree that a compensation order should be awarded
- agree that a compensation order should be awarded
- agree or change the quantity awarded
- agree on who the compensation should benefit
A compensation order usually carries with it an order to pay the costs and expenses of the Secretary of State.
At all stages in the proceedings any new information provided to the Insolvency Service or the court is reviewed and the proceedings can be stopped if they are no longer considered to be in the public interest.
9. How compensation is paid
The compensation can be paid to the Secretary of State for distribution to a creditor or a class of creditors as a contribution to the assets of the company.