Company Director? Are you at risk from changes to insolvency laws?

Various changes to insolvency law came into force on 1 October but many seem to have slipped in almost unnoticed and directors may not be aware of their impact. Two changes of particular relevance are:

Disqualification/Compensation
Orders:
The period for applying for a disqualification order against a director of an insolvent company will be extended from 2 to 3 years. In addition, for conduct arising after 1 October 2015, the court now has the power to order a director to pay compensation to a creditor who has suffered loss as a result of misconduct leading to disqualification. As an alternative it may be possible for the director to agree to pay compensation so as to avoid the court process.

As failure to pay monies due to HMRC is a potential ground for director disqualification it is possible that directors may find themselves personally liable to HMRC under the new regime which will no doubt cause concern amongst many and does rather detract from the limited liability status of a company.

Assignment of claims:Not only will administrators now be entitled to bring claims for wrongful or fraudulent trading against directors (previously only liquidators could) but both administrators and liquidators will be entitled to assign the benefit of such claims to third parties (and essentially treat the right of action as an asset to be disposed of).

This could result in better funded and more aggressive claimssince a third party will not be limited by justifying its action in the interest of creditors. Companies will need to consider whether the insurance they currently have in place extends to provide protection against the extended powers brought in on 1 October 2015 and it will also be interesting to see how matters develop when the new powers are actually exercised.

New measures are being introduced to provide a greater deterrent for company directors against acting improperly. A compensation process is also being introduced to provide better financial redress for the loss creditors have suffered as the result of the conduct of disqualified directors.