Threat to directors as the disqualification regime is set to be strengthened
In light of Vince Cable’s announcement that he intends to push through legislative change to strengthen the directors’ disqualification regime in the UK, should company directors be more wary of personal liability arising out of their conduct as directors of a company?
On 19 April 2014, Vince Cable claimed that he intends to bring in various measures, including allowing the government to ask the court to grant compensation payable by rogue directors to victims of their misconduct. It is currently not known how this will manifest itself, but it seems that the relief sought from the Secretary of State by way of disqualification may be a new avenue for unsecured creditors to recover monies owed to them by companies run by directors who have breached their obligations.
Directors’ disqualification proceedings arising out of insolvent companies are civil proceedings brought in either the County Court or the High Court. The aim of the proceedings is to protect the public from future misconduct by those who have shown themselves to be unfit to act as directors. The period of disqualification can be up to 15 years for the most serious cases involving acts of fraud and dishonesty. However, it has never been the aim of the regime to seek compensation for victims.
There are invariably going to be victims when any company goes into liquidation. Any creditors who are not paid out in full are clearly entitled to consider themselves as a victim. If it is the case that the losses of individual creditors have been caused by the misconduct of a director, are those creditors going to have a legitimate expectation of the government to seek compensation on their behalf from a director? Traditionally it has been the role of the liquidator to consider what claims the company may have against directors for breach of their fiduciary duties and to recover monies for creditors by virtue of those claims. Unfortunately, liquidators are often unable to pursue claims due to financial constraints or reluctant to take the risks associated with litigation if the merits of the claim are not clear.
Is the government now looking to fill the void by giving the courts powers to make compensation orders when considering a director’s conduct in the context of disqualification proceedings or is this designed to act as merely a further deterrent?
The directors’ disqualification regime has long been criticised for lacking real teeth when it comes to the most serious offenders and the powers that the Company Directors Disqualification Act 1986 gives to the courts is often undermined by a failure to police and enforce disqualification orders. The Insolvency Service, who are the agency that prosecutes cases on behalf of the Secretary of State for Business Innovation and Skills, are underfunded and over stretched. Consequently, the concern is that the latest measures will have little practical impact unless there is a significant increase in the funds available to prosecute the claims. Mr Cable is quoted as saying that:
“Rogue directors can cause a huge amount of harm in terms of large financial losses, unnecessary redundancies and lifelong investments going down the drain. It is only right that we should put the toughest possible sanctions in place, make sure we stamp out unfair practices and deter those who are looking to act dishonestly.”
Furthermore, his department has previously reported that each disqualification saves the British economy around £100,000 due to the avoidance of their otherwise detrimental impact. However, clearly the treasury does not view it this way as there have been significant funding cuts to the Insolvency Service since the coalition government came into power which has resulted in a reported 30% decrease in the number of disqualifications.
The reality is that the legislative changes will create a further risk for directors, but only time will tell what the practical implications are. asb law remains one of the leading firms in defending directors prosecuted by the insolvency service and we will be keeping a close eye on these developments.
For more information on the director's disqualification scheme please contact Andre Frake, Associate, Dispute Resolution.
Published: 5 Jun 2014