UK: Warning To Directors – Don't Get Caught Out By The Small Business Enterprise And Employment Act 2015

Last Updated: 13 July 2015
Article by Emma Davies

This article considers the Small Business Enterprise and Employment Act 2015 (the Act) and the measures the Act is due to implement, with a particular focus on directors' disqualification.

Background to the Act                                                                   

The Act aims to increase transparency in companies and address directors' misconduct to ensure the UK is seen as a trusted and fair place to do business.  The Act also aims to simplify company filing requirements (reduce the red tape) whilst at the same time increasing the quality of information on the public register.

Changes are expected to happen in a number of stages, with changes to the directors disqualification regime (on which this article focuses), estimated to be implemented early in 2016.

Aims of the changes to the directors' disqualification regime

Changes have been made under the Act to the directors' disqualification regime, at present governed by the Company Directors Disqualification Act 1986 (the CDDA), with a view to:

  • strengthening the current director disqualification regime to give consumers confidence that actions are being taken against wrongdoers;
  • simplifying the way in which insolvency practitioners (IPs) can report directors' misconduct; and
  • compensating creditors for directors' misconduct.

Accordingly directors must be alert to acting in the best interests of a company at all times, or if that company is in financial difficulty, in the best interests of creditors, prioritising those interests above their own.

Changes being made to the directors' disqualification regime

Part 9 of the Act implements a number of changes to the CDDA aimed at strengthening the directors disqualification regime and creditor compensation.   The key changes include:

  • After a company enters an insolvency procedure, the IP must prepare and submit to the Secretary of State (SoS) a report on every director of an insolvent company (i.e. a company that is liquidated or is in administration).

This reporting requirement is wide and directors should be aware that:  

  • A report will be commissioned on them if they have been a director of a company that enters an insolvency procedure;
  • A report will be commissioned on them even if they are no longer a director of the company, provided they were, at some point a director in the three years prior to the company's insolvency.
  •   The report must describe any conduct which may assist the SoS in deciding whether to apply to court for an order disqualifying a person from being a director.

Directors should bear in mind that this widens the scope of what an IP can include in their report and also means that an IP can disclose any new information which comes to light following the filing of their initial report.

  • The Court when considering whether to make a disqualification order against a director, can now consider a wider range of matters, including the director's previous conduct and nature of losses caused.  In addition, the time period within which an application may be made for a disqualification order against an unfit director has been extended to three years (previously it was two years) following insolvency of the company.

These changes give the SoS more time to consider a wider range of matters, at the same point this gives directors more time to comment on evidence against them.

  • The Court may make a compensation order against a director.  This makes the director financially accountable for the loss he/she has caused.  Redress can be made to a creditor or class of creditors or as a contribution to the company's assets.  An application for a compensation order by the SoS must be made within two years of disqualification of the director in question.

The compensation order extends the accountability of a director and he/she will be responsible for the loss caused to creditors, a class of creditors (e.g. employees) or as a contribution to the company's assets.  

  • Finally, disqualification proceedings may be issued against a person who has caused a director's unfitness.  This essentially covers those who have influenced a director of a company (but not a shadow director) to carry out the conduct which he/she has been disqualified for.

This widens the scope of disqualification proceedings against those who may have influenced a director and in this regard those who have active input on a company's activities should bear this in mind.

 Practical tips for directors

  • The reporting duties of IPs and considerations which the Court can take into account are now wider than before.  A director must act in the best interests of the company at all times, or if that company is in financial difficulty, in the best interests of creditors, prioritising those interests above their own. 
  • If a company is in financial difficulty a director should seek specialist legal or insolvency advice as soon as possible, to avoid acting in a way which may in the future result in them being disqualified or even being required to pay monies to creditors (although it is yet to be seen how compensation orders will work in practice and how much a director will be ordered to pay).
  • Those with controlling influences over companies must avoid influencing a director to act in a way which results in a breach of duty and ultimately disqualification, or they could face disqualification proceedings being brought against them. 
  • If in doubt seek legal advice or specialist insolvency advice.       

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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