If the Insolvency Service has raised a compensation order alongside your director disqualification undertaking, you may face a second, separate financial claim under section 15A of the Company Directors Disqualification Act 1986. A compensation order can only be made against someone already disqualified, and it requires the Secretary of State to prove your conduct caused identifiable loss to named creditors, not simply that your conduct was unfit. This is to ensure any compensation order made is directly linked to the harm caused, rather than be punitive or arbitrary.
The Secretary of State has two years from the date of the disqualification order or undertaking to apply for a compensation order. Naturally, many of my clients find this 24 month time frame incredibly stressful due to the uncertainty it provokes.
In some cases, it is a good strategy to offer a compensation undertaking as an alternative to a court-ordered compensation claim, as it removes the ‘sword of Damocles’ element and may costly litigation. However, before choosing such a route, it is crucial to take legal advice from an experienced Insolvency Law Solicitor, who can ensure your best interests are protected.
Summary
- What is a disqualification undertaking?
- What is a compensation order?
- How is the compensation amount set?
- Can you challenge a compensation order?
- What if the issues of compensation undertakings and director disqualification arise together?
- What should you do next?
What Is a Disqualification Undertaking?
A disqualification undertaking is a written agreement you give to the Secretary of State under section 1A of the Company Directors Disqualification Act 1986, accepted instead of contested court proceedings. Around 85% of disqualifications are by undertaking under section 1A CDDA rather than court order.
Once accepted, your undertaking takes effect from the date specified, appears on the Companies House disqualified directors register, and carries the same restrictions as a court order for between two and fifteen years.
If you are still weighing up whether to sign or contest the underlying director disqualification, you will find our guide on how to challenge director disqualification useful for understanding the grounds available and the realistic prospects at each stage.
What Is a Compensation Order in Relation to Director Disqualification?
A compensation order requires you to pay money to named creditors or into the insolvent company’s assets.
Section 15A(3) of the Company Directors Disqualification Act 1986 sets two conditions that must be met before the Secretary of State can apply for a compensation order:
- you must already be disqualified, and
- your conduct must have caused loss to one or more creditors of an insolvent company of which you were a director.
Setting the Compensation Amount
Under section 15B(3) of the Company Directors Disqualification Act 1986, the court or the Secretary of State must have particular regard to the amount of loss caused, the nature of your conduct, and whether you have already made any other financial contribution in recompense.
The case of Secretary of State for Business and Trade v Barnsby [2023] EWHC 2284 (Ch), illustrates how the court considers the ‘conduct’ element of making a compensation order.
The defendant company traded as a travel operator, providing safari holidays in Africa. The Defendant was the sole director of the Company and held 80% of its shares. The Company committed serious and continuing breaches of ATOL legislation after its ATOL licence expired, and committed criminal offences by continuing licensable, flight-inclusive holiday activities without a valid ATOL.
The Defendant instructed staff to continue accepting holiday bookings involving flights despite the licence having expired. The Defendant knew that the Company continued to take bookings requiring ATOL protection yet gave no instruction to stop. His actions caused, and his omissions allowed, material and continuing contraventions of ATOL regulations.
Insolvency and Companies Court Judge Sally Barber described the Defendant’s principal failings as causing and allowing continuing breaches concerning flight-inclusive holiday bookings. She found his conduct “woefully reckless and incompetent” for a sole director operating in a highly regulated sector. The conduct exposed consumers to further financial loss and was aggravated by ATOL branding and references that misled consumers about the protection available for their bookings. It was therefore concluded that the Defendant’s conduct caused each affected customer’s loss and granted a compensation order in the sum of £81,405 plus interest at 1.5% per annum from the date of liquidation of the company.
Can You Challenge a Compensation Order?
Yes. Because a compensation order requires proof of specific creditor loss caused by your conduct, this is a separate factual question from whether you were unfit to act as a director, and you can contest it on its own evidence.
If you have already accepted a compensation undertaking, section 15C of the Company Directors Disqualification Act 1986 lets you apply to the court to vary or revoke it, although this route sets a high threshold. In my experience, you are generally better placed negotiating the compensation figure before any undertaking is finalised, since the amount agreed at that stage is difficult to reopen once signed.
Compensation Orders and Disqualification Arising Together
It is common for the Secretary of State to raise a compensation order or undertaking alongside disqualification talks, particularly in cases involving Bounce Back Loan fraud where lender loss is easy to quantify.
Negotiating both disqualification and compensation together can be strategically advantageous. The length of the disqualification period and the compensation figure are interrelated and may influence the final settlement. For instance, directors may offer undertakings to avoid court proceedings, which could include agreeing to compensation terms. This approach can save costs and expedite resolution, as the Secretary of State often prefers undertakings to avoid lengthy litigation. However, the timing of such negotiations is critical; earlier agreements are more likely to result in favourable terms, including reduced costs.
What to Do Next
If you have been asked to sign a disqualification undertaking, or the Insolvency Service has raised the prospect of a compensation order, the terms you agree now are difficult to challenge later.
Our Director Disqualification Solicitors can review the evidence with you before you sign anything and negotiate compensation terms directly with the Secretary of State on your behalf.
Call us on 0300 303 2071 or fill in our enquiry form to arrange a confidential first conversation.
FAQs
Why Do Directors Accept an Undertaking?
You may prefer an undertaking because it settles the matter faster and at lower cost than contested section 6 proceedings, which can run for 9 to 18 months before reaching a final hearing.
Can I Be Given a Compensation Order Without Being Disqualified First?
No. Under section 15A(3) of the Company Directors Disqualification Act 1986, a compensation order or undertaking can only be made against someone already subject to a disqualification order or undertaking. The two are always linked, even though they answer different questions.
How Long Does the Secretary of State Have to Seek Compensation From Me?
The Secretary of State must apply within two years of the date your disqualification order was made or your undertaking was accepted, under section 15A(5) of the Company Directors Disqualification Act 1986. After that window closes, this route is no longer available to them.
Who Receives the Money If a Compensation Order Is Made Against Me?
Payment can go to the Secretary of State for the benefit of named creditors or a class of creditors, or as a contribution to your former company’s assets, under section 15B(1) of the Company Directors Disqualification Act 1986. This gives the regime more flexibility than a standard insolvency distribution.
Does Signing a Disqualification Undertaking Mean I Automatically Owe Compensation Too?
No. A compensation order or undertaking is a separate step. The Secretary of State still has to establish creditor loss caused by your specific conduct under section 15A(3)(b) of the Company Directors Disqualification Act 1986, in addition to the disqualification itself.
Last reviewed: August 2026
