Broad Misconduct Test and Fault-Based Compensation Orders Create New Headaches for UK Directors

business headache

Back in August last year I blogged about a discussion paper entitled Transparency & Trust: enhancing the transparency of UK company ownership and increasing trust in UK business which had just been published by the Department for Business Innovation and Skills.

The paper contained some far-reaching and eye-catching proposals which, as I said at the time, would, if implemented,  have some profound effects on the way in which UK companies are governed, managed and controlled.

Government Response

Now the UK government has published its response. Part A of the response focuses on  improving transparency around who owns and controls UK companies and part B focuses on making directors more accountable for failure to fulfill their duties.

Broadly the government has signaled its intent to introduce most of the proposed changes. In this blog I will look at the part B proposals only since they have the most direct relevance to D&O liability. (The Part A changes, though, are pretty-eye catching too!)

Director Accountability

The big changes relating to director accountability constitute a significant revamp and expansion of the court’s powers under the Company Directors Disqualification Act 1986 (CDDA). Key among these are:

1) Broader Provisions

New, broader and more generic provisions setting out a range of factors covering misfeasance, breaches of duty, legislation and sector regulation applying to an individual as a director, which can be relied upon to justify disqualification. Courts will be given discretion to take into account the materiality of the conduct, the culpability of the individual and the impact of the individual’s behaviour on others. Under the CDDA as it stands, the relevant factors are both more restrictive and prescriptive.

2) Overseas Misconduct

A director’s overseas misconduct will be able to be taken into account in disqualification proceedings. This is an interesting development which will be of concern to directors of companies incorporated in the UK with global operations. That said, whether “misconduct” for this purpose will be construed more widely than actual criminal conviction remains to be seen.

3) Improved Regulatory Cooperation

Improvements to channels of communication between the various sectorial regulatory regimes such as the Financial Conduct Authority and the Insolvency Service. Whilst the government has stopped short of giving regulators direct powers to bring disqualification proceedings, it has proposed the removal of barriers for information sharing and for investigatory cooperation.

4) Compensatory Orders

Perhaps most radically, the government proposes that the Secretary of State be given powers to apply to court for compensatory orders to be made against a director who has been disqualified, in circumstances where that director’s actions have caused identifiable loss either to specific creditors or to creditors generally.

It is not yet clear how this new regime will sit with the existing framework of wrongful trading proceedings but it seems likely  that, if enacted , these powers will represent a powerful supplement to the weapons in the hands of a liquidator which could be turned against directors of insolvent companies. That’s because the categories of misconduct justifying disqualification are themselves to be considerably reshaped and relaxed (see above).

5) Third-Party Involvement

As previously reported when the discussion paper was first published, the government also intends to allow insolvency office holders to sell or assign to third parties causes of action that arise on insolvency (including those for fraudulent or wrongful trading).

When?

The big question is when all this will hit the statute books. Although the government has said it will implement the changes as soon as parliamentary time allows, the need for primary as well as secondary legislation leaves open the question as to whether this can happen before the next general election.

Having said that, it is perhaps unlikely in the current political climate that changes aimed at increasing director accountability will be left on the back burner too long whatever the complexion of the next government.

Speaking for myself, it is the combination of the proposal to assign rights of action against directors on a contingency fee basis coupled with a new flexible regime of fault-based compensation orders which would be the biggest cause of future interrupted sleep if I were a company director.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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