First case ordering a disqualified director to pay compensation

First case ordering a disqualified director to pay compensation

First case ordering a disqualified director to pay compensation

In Re Noble Vintners Ltd; the Secretary of State for Business, Energy and Industrial Strategy v Eagling [2019] EWHC 2806 (Ch), the first case brought by the Secretary of State under the new compensation order regime (the “Regime”), the High Court has ordered a disqualified director to pay compensation equal to the sum of funds he misappropriated from the company. The Regime was introduced in October 2015 by s15A and 15B of the Company Directors Disqualification Act 1986 (CDDA 1986).

The facts and Court’s decision

On 14 May 2019, the defendant was disqualified for the maximum period of 15 years under the CDDA 1986.

On 22 June 2017, the company entered creditors’ voluntary liquidation. From 2 November 2015 to 18 October 2016, the defendant misappropriated funds totalling £559,484 and during that period it was clear the company had very little prospect of being able to pay its substantial creditors. The misappropriated funds had been paid to another company (of which the defendant was sole shareholder and director) with no evidence of any legitimate business purpose.

This misappropriation caused loss to the company’s creditors, equal to the amount of the misappropriated funds. Under the Regime, liability is not based on loss to the company but on the loss suffered by the individual creditors. Therefore a compensation award of £559,484 (i.e. equal to the misappropriated funds) was made against the director pursuant to sections 15A and 15B CDDA 1986.

The defendant was solely responsible for the misappropriation and was ultimately the sole beneficiary. He had made no other recompense and he was unlikely to be compelled to do so, as the insolvent company’s liquidator lacked any funds to pursue him on behalf of the creditors generally.

The Court’s comments on the new Regime

The Court commented on various aspects, finding:

  • The Regime is a new, free-standing regime operating outside of the Insolvency Act 1986, because liability is not based on loss to the relevant company, but on loss to individual creditors. As such, it was held not to conflict with the Insolvency Act 1986 and the pari passu principle (see further below).
  • The intention of the Regime was to increase the protective element of disqualification, by giving monetary redress to creditors who had lost money directly because of the director’s misconduct.
  • The Regime is designed to cover all types of misconduct for which a director may be disqualified under CDDA 1986, and it may enable recoveries to be made where there is wrongdoing but there is no loss suffered by the company (unlike, for example, wrongful trading).
  • The Court must be satisfied, using hindsight and common sense but without considering foreseeability, that the misconduct has caused loss within the meaning of CDDA 1986 to a creditor of a relevant (insolvent) company.
  • “Loss” is undefined but has to be measurable in monetary terms.
  • There are strict checks and balances at every stage which will prevent double recovery for what is factually the same wrong. Where there were, or might be, insolvency act proceedings, recoverability would have to be considered, as would the questions of whether the two regimes were competing for the same pot and the fairness of making a compensation order, especially if issued after the issue of any application for an insolvency act remedy.

Comment  

Tim Carter, Co-head of Restructuring & Insolvency at Stevens & Bolton comments:

“This case provides a useful analysis of, and comment on, how the new regime interacts with the Insolvency Act 1986 and established principles of insolvency law. The key takeaway is that this is an entirely separate regime, which should hopefully provide wider redress for creditors wronged by the actions of a disqualified director. As was noted by the Judge in this case, it will be interesting to see if the Regime is more fully exploited, whether it results in fewer disqualification cases being settled early; the obvious impact being an increase in required court time and stretching the Secretary of State’s limited resources ever thinner. ”

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