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Published 15 April 2015
Once in force, the Small Business, Enterprise and Employment Act ("the Act") will impact upon existing compliance obligations for companies and many of its provisions will result in the consequential and related amendments to existing legislation. The legislation most immediately affected is the Companies Act 2006 ("CA 2006"), Company Directors Disqualification Act 1986 ("CDDA 1986") and the Insolvency Act 1986 ("IA 1986"), amongst others.
It is a wide ranging Act comprising a number of reforms. Its aim is the increased transparency in the running, control and ownership of companies and certain of the changes will simplify the filing processes for corporate documents and improve the accuracy and integrity of the public register, all of which is designed to reduce "red tape". However, there are number of changes which will have a direct effect on companies and their directors.
In an attempt to increase transparency, the Act restricts the use of corporate structures to hide illegal activity, and will prohibit companies and other corporate entities from being appointed directors. Given this significant change, it is expected that there will be a one year transitional period in which to appoint replacement individual directors.
In relation to the disqualification of individual company directors, one of the reforms the Act introduces are new measures to modernise and strengthen the requirements and procedures under which company directors can be disqualified. These measures are aimed at making it easier for the Secretary of State ("SofS") to pursue directors who do not comply with their obligations. To assist this process, the period of time which the SofS has to bring proceedings against a director of an insolvent company for disqualification has increased to three years instead of two. The maximum period for which an individual can be prohibited from acting as a director remains the same at 15 years.
To assist the SofS in considering whether a director's conduct merits disqualification, Insolvency Practitioners will now be required to provide and file a report on the conduct of every director of a company, which becomes insolvent and to highlight any conduct which may assist the SofS in deciding whether it is in the public interest to make an application for a disqualification order. When considering the question of misconduct, the courts will also now take into account a wider range of factors including the conduct of the director in other companies and the nature of the insolvent company's losses.
The Act also introduces two new provisions under which the SofS can seek disqualification, namely:
A new provision has also been introduced where the SofS may make an application to the court for an order for payment of compensation by a director whose conduct has caused him to be disqualified, and who has caused identifiable loss to a company's creditors and thus makes him directly responsible for losses as opposed to hiding behind the corporate entity.
The new measures are aimed at increasing confidence in the directors' disqualification process and also to provide a process whereby in certain circumstances, compensation can be awarded to creditors who have suffered as a result of a director's misconduct. Whilst these aims are both desirable and laudable, with the lack of investment in the Insolvency Service, and the shortage of staff, it seems unlikely that the reforms, in so far as it affects the directors' disqualification process, will have any significant effect. The proof of the pudding will be in the eating, but public confidence in the system will only be improved by tangible results and unless additional resources are made available, it appears unlikely that the Insolvency Service will be able to live up to and realise the ambitions of this new Act.
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