Compensation orders were introduced on 1 October 2015 by the Small Business, Enterprise and Employment Act 2015 which amended the Company Directors Disqualification Act 1986, and aim to make directors financially account for the consequences of their unfit conduct.
A compensation undertaking can be entered into voluntarily without the need for court proceedings, or may be the result of a court order.
The Insolvency Service decides whether it is in the public interest to seek a compensation order, with decision making exercised by a separate department to that carrying out the disqualification and compensation investigation function.
Except where settled by undertaking, any application for a compensation order will be heard and decided by the court, which may also agree or change the quantity of the payment and direct who the money should go to.
If an undertaking is accepted before court proceedings start then the Insolvency Service will not recover any costs of their investigation from that director.
Once court proceedings have started, a director may still offer to give an undertaking. This will stop the court proceedings, but the director may be required to pay the costs and expenses incurred in the proceedings up to the date of the undertaking.
There are time restrictions on the process: the application has to be within two years of the disqualification and compensation can only be sought for conduct that occurs on or after 1 October 2015.
A compensation undertaking comes into force on the date it is made.
The principles considered when calculating loss include whether the disqualification conduct caused an identifiable loss to one or more creditors; the nature of the creditors and whether they have other forms of redress; the ability to readily identify the creditors affected and quantify the loss to each creditor (or class of creditors); and whether through the insolvency process, for example liquidation, there has been or predicted to be a (material) repayment to those creditors.
The compensation can be paid to the Secretary of State for distribution to a creditor or a class of creditors as a contribution to the assets of the company.
A guide to compensation orders is here