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All change for Director Disqualification?

In or around early November 2014 Parliament will have a report put before it in relation to the Small Business, Enterprise and Employment Bill, which could mean all change for Director Disqualification law.

This Bill proposes a number of potentially significant changes to insolvency law, insolvency practice and insolvency regulation as well as to director disqualification, all of which are core areas of NDP’s practice.  In an article published in Issue 57 (August 2014) of the Disqualification Newsletter published by Lexis Nexis (Transparency and Trust: a new era for directors’ disqualification*), Donald Lilly (a Barrister at 4 Stone Buildings) and  Neil Davies and Anne-Marie Chinnery of NDP critiqued certain key aspects of the Bill in some detail.  Some of the proposed changes included in the Bill are:

1. The procedure in which the insolvency office holder reports a director’s conduct to the Secretary of State will be streamlined and speeded up to within three months of appointment.

However, those office holders will be under an ongoing obligation to report any new information that should have been included in the return.  This appears to balance off the risk of more ‘clean’ returns being submitted (because it is too early and the office-holder has less knowledge) on a director’s conduct.

2. Extensions of the time limit for instituting disqualification proceedings against directors (and others) from two years to three years.

In the Article we encourage better and earlier pre-action communication from the Secretary of State as a matter of fairness.  That should allow directors an opportunity to comment on the draft evidence or pre-action letter prior to the commencement of proceedings against them.  This may also reduce the director’s exposure to the adverse costs risk arising from when the Secretary of State serves proceedings on the same.

3. The introduction of compensation orders against disqualified directors.

The Bill proposes that in the two years following disqualification the Secretary of State will be able to apply for a compensation order against the disqualified director.  The proceeds could be paid to specified creditors or classes of creditors or as a contribution to the insolvent company’s assets generally.

This may be a laudable aim, but may struggle to work in practice. In the Article there is a discussion surrounding:

(a) The causal link that the Secretary of State for Business, Innovation and Skills will have to show (i.e. the director’s conduct being connected to a loss);

(b) The interaction/conflict with misfeasance under section 212 of the Insolvency Act 1986 (a summary remedy available against delinquent directors that liquidators can use); and

(c) How would any parallel litigation for compensation by the office holder and the Secretary of State coincide – if one claim fails, will the other?  What about if one claim succeeds – does the other continue and if so how?

In the article the authors conclude that compensation should be left as a private matter to be litigated by liquidators or individual creditors and members.

We will keep you up to date on the progress of this Bill in relation to director disqualification and insolvency law as it heads towards its final stages in parliament, and how it will ultimately affect directors of companies.

If you have a director disqualification problem, then contact us for a free initial discussion. The sooner you do so, the more likely it is that we can help.

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