North East business creditors who’ve suffered financially due to the misconduct of directors of firms that have become insolvent are set to get a better chance of recovering their losses.

A new update to the Company Directors Disqualification Act 1986 (CDDA) has introduced the option for a ‘compensation order’ to be made against a disqualified director where the conduct of that director “has caused loss to one or more creditors of an insolvent company of which the person has at any time been a director.”

And Neil Harrold, partner in the insolvency team at Hay & Kilner Law Firm in Newcastle, has welcomed the move as a way of protecting innocent parties from suffering as a result of the past activities of an errant company director in parallel with the existing CDDA provisions for stopping similar incidents occurring in the future.

Compensation orders have been designed to retrieve any profit made by the errant director resulting from their unfit conduct and to enable those who lost out to receive recompense for their existing losses without the need for separate litigation.

Liability is based on loss to its individual creditors of the relevant company, rather than on the loss of the company overall.

Around 1,200 company directors are currently disqualified every year under the CDDA regime, either by being made subject to either a disqualification order imposed by the Courts or agreeing to give an undertaking that prevents them from being a director or concerned in the management of a company for between two and 15 years.

Most directors targeted for disqualification by the Insolvency Service do not contest the matter, with consistently well over 80% taking the second option without their cases ever reaching the Courts.

Neil Harrold, who is also past North East chair of insolvency and restructuring trade body R3, is advising directors of struggling companies to document their actions as they are going, noting why they believe what they’re doing is in the best interests of creditors in case they are questioned at a later date.

He says: “Disqualification orders protect society from the future activities of an errant director, but up to now, the CDDA regime has not enabled the Courts to compensate those who have already suffered losses as a result of their actions.

“For creditors, especially those that have continued to supply client companies up to the point of their demise, compensation orders open up a new potential means for the recovery of losses, and will very much be welcomed by those that have lost out through no real fault of their own.

“For directors of companies that are facing financial difficulties, the risk of being held personally liable for their actions have markedly increased under these new rules, and maintaining a contemporaneous record of why they took the business decisions that they did would appear to be a very prudent step to take.

“This is a very new and evolving area of law, and it is expected that the Insolvency Service will also be targeting directors who have continued trading a company “beyond the point of no return”, irrespective of whether or not they have personally enriched themselves at the direct expense of creditors.

“Anyone who thinks their business is heading for trouble would be well advised to seek independent advice from either a licensed insolvency practitioner or specialist insolvency solicitor on whether continued trading can be justified or whether formal insolvency procedures should be considered.”

Established in 1946, Hay & Kilner is one of North East England’s leading independent law firms and provides a full range of legal services to businesses and individuals from both within and outside the region.