What are Compensation Orders?
Compensation Orders force the director (or ex-director) of a limited company to pay compensation to their creditors.
Compensation is only payable if:
- Creditors have suffered a quantifiable loss; and
- This loss was caused by the director’s unfit conduct; and
- The director has been disqualified or entered into a voluntary undertaking
Compensation orders haven’t always been pursued in the past, but it seems the Insolvency Service and HMRC are now starting to use them as a remedy to recover outstanding debts such as tax and government-backed loans. If a Bounce Back Loan or similar was taken out by a business during Covid and the director has been disqualified, HMRC are now considering Compensation Order use to recoup these funds.
Director disqualification proceedings are increasingly associated with compensation orders. This requires a director who is disqualified, or who has entered into a voluntary undertaking, to pay compensation to their creditors. An individual who is unable to fulfil a compensation order may be subject to bankruptcy proceedings.
Contact our legal experts if you are facing director disqualification proceedings, or you have been advised that the Secretary of State intends to seek a compensation order. We can advise on all aspects of director disqualification proceedings and compensation orders. We will work with you to find the best possible solution.
Compensation Orders and Director Disqualification
If the Secretary of State believes that the director of a limited company is guilty of unfit conduct, it will bring director disqualification proceedings against that individual. There is no set definition of ‘unfit conduct’. It could include trading while a company is insolvent, not paying tax and fraud.
If a company director is disqualified through a court order or an undertaking, then the Secretary of State can also pursue a compensation order against them. The aim is to make the director financially liable for the consequences of their unfit conduct.
Compensation orders were introduced in 2015. The law was amended in 2021 so that directors of dissolved companies can also be subject to compensation orders. This law is retrospective, meaning it applies to those who dissolved their companies prior to the law changing in 2021.
How do Compensation Orders work?
Once a director is disqualified, the Insolvency Service (who acts on behalf of the Secretary of State) has two years to bring an application for compensation.
If you have been told that the Insolvency Service intends to seek a compensation order, we strongly recommend that you contact our solicitors for expert legal advice.
You have two options:
- Enter into a compensation undertaking, which is when you voluntarily agree to pay compensation; or
- Dispute the compensation order and take the matter to court
If you choose to enter into a compensation undertaking, then the undertaking comes into force on the date it is made. You will have to pay compensation to the Secretary of State, which will then distribute the money to the company’s creditors.
If you choose to dispute the compensation order, there will be a court hearing. The court will decide whether or not a compensation order should be issued. If a compensation order is awarded, the court will also decide how much you need to pay, and which creditors should benefit.
If you dispute the compensation order, you can change your mind and offer to enter into a voluntary undertaking instead. However, if court proceedings have already started, then you may be required to pay the costs incurred by Insolvency Service up to the date of the undertaking.
How much compensation will I have to pay?
The amount to be paid is assessed on a case-by-case basis. It depends on the ‘quantifiable loss’ incurred by the company’s creditors. Consideration is also given to whether you have made any other financial contribution in recompense for your conduct. This means that you likely will not have to pay compensation if:
- An insolvency practitioner has taken or is going to take civil recovery action against you
- You have made a contribution to the assets of a company in formal insolvency proceedings
Get legal advice
Compensation orders regularly run into many thousands of pounds. If you cannot pay, you could be made bankrupt.
These are serious consequences. That is why anyone facing director disqualification proceedings should get immediate legal advice. With the right approach, it may be possible to successfully defend a director disqualification – meaning that you avoid the threat of a subsequent compensation order. Alternatively, it may be possible to negotiate a voluntary undertaking with the Secretary of State, on the basis that a compensation order is not sought.
If you have already been disqualified and have been notified about a compensation order, we can advise what steps to take next. There are options available to you. We can discuss these with you in more detail, conducting a robust exercise in damage limitation.
Contact us now
We are seeing compensation orders being sought in increasing numbers, particularly in cases where a company is wound up with a large amount of debt still outstanding. HMRC is keen to recover as much money as possible to the public purse, particularly in the wake of the Covid-19 pandemic.
Our solicitors are highly experienced in this area of law. We can help you navigate Director Disqualification proceedings and a compensation order application.