The first compensation order

Monetary redress from a disqualified director

On 1 November 2019 Insolvency and Companies Judge Prentis made a Compensation Order pursuant to 15A and 15B of the Company Directors Disqualification Act 1986 against Kenneth William Eagling. Compensation Orders were introduced with effect from 1 October 2015 and entitle the Secretary of State to seek monetary redress from a disqualified director for the benefit of creditors who have lost out as a result of a director’s misconduct. The Judgment is the first of its kind under the new regime and shows how it could move the goalposts for Insolvency Practitioners and other stakeholders.

Insolvency Practitioners will typically have potential claims against the former directors based upon the misconduct relied on the Disqualification application and the concern for Insolvency Practitioners is how this new regime could impact their ability to pursue claims and make recoveries under the Insolvency Act 1986.

Background

Mr Eagling was the sole director of Noble Vintners Limited (“Noble”). Noble traded as a wine broker selling wines to and on behalf of its clients. Noble entered creditors’ voluntary liquidation on 22 June 2017, with an estimated deficiency to creditors of £1,678,614.

The Secretary of State issued disqualification proceedings against Mr Eagling on the basis that he caused Noble to incur obligations which it did not meet. It was alleged that Mr Eagling paid the majority of Noble’s income to a company controlled by him, without any commercial justification for so doing. The sums paid to this company totalled £559,484.

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The Secretary of State sought the maximum period of disqualification (15 years) and the Judge found that Mr Eagling’s conduct warranted the maximum period of disqualification.

When issuing the disqualification proceedings the Secretary of State also sought a Compensation Order on the basis that Mr Eagling’s conduct had a substantial effect on Noble’s creditors. ICC Judge Prentis agreed a Compensation Order was necessary and ordered Mr Eagling to pay £559,484 with £460,067 being paid to the Secretary of State for distribution to 28 specific creditors and £99,416 being paid to the liquidator of Noble by way of a contribution to the assets of the company.

Issues and Implications

In Noble the Judge highlighted the differences between the compensation regime and the recovery routes available under the Insolvency Act, stating that in the former liability is not based on the loss to the relevant company but the loss to individual creditors. He went on to state that the intention of the compensation order regime is to enhance the protective aspect of the disqualification regime and to provide creditors with a remedy where no remedy is available under the Insolvency Act.

The main concerns for Insolvency Practitioners are the possible disruption to the order of priorities of distribution, the disregard of the pari passu principle and an element of double accounting because the new Section 15B gives the Court discretion in respect of the amount of compensation and to whom it is paid.

In Noble the Judge acknowledged that in many situations there will be overlap between the facts founding the compensation application and other claims within a liquidation but he was satisfied that the regime contained checks and balances which would prevent an injustice occurring. In particular he was satisfied that any court would bear in mind that no statute should be interpreted so as to permit or impose a double recovery and would take into account any contributions made by a director or the possible risk of the director having to make a contribution in the future as a result of an application by an Insolvency Practitioner.

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In Noble, the Judge decided it was right to compensate directly those creditors whose debts accrued after 2 November 2015 when Mr Eagling took over the running of the company and whose losses were directly attributable to his misconduct notwithstanding the substantial losses suffered by other creditors who were not customers in this period. In doing so the Judge acknowledged the post 2 November 2015 creditors did not have proprietary claims and would therefore ordinarily rank equally in line with the remaining unsecured creditors.

In order that £99,146 be paid to the Liquidator as a contribution to the assets of the company, the Judge anticipated that this sum would (in part) be available to pay the Liquidator’s fees and expenses notwithstanding he had not paid an active part in the proceedings.

The Order made reflected exactly the orders sought by the Secretary of State but it is not clear that the Insolvency Service will adopt such an IP friendly approach in every case given the Court has very broad discretion as to the compensation it can award.

Whilst the Judgment provides some comfort to Insolvency Practitioners on how the new regime could work with Insolvency Practitioner’s powers under the Insolvency Act 1986 it is very early days and this is a first instance decision which was not opposed by the director and in which the Liquidator played no part. It is very easy to see how in other circumstances the Court would have to hear representations not only from the director but the Liquidator and assorted creditors before deciding what order to make.

In the past Insolvency Practitioners have often delayed issuing proceedings against directors under the Insolvency Act 1986 until after they have seen the outcome of disqualification proceedings. In light of the new regime, this delay would now be ill-advised as directors would no doubt be struggling to meet a Compensation Order and other liabilities by the time an Insolvency Practitioner sets out their claim.

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On the other hand since the Secretary of State has limited resources it seems likely the Insolvency Service will target cases in which the officeholder appears to be inactive perhaps through a lack of resources or where the director appears to be a man of straw (in the Noble case Mr Eagling resides in Northern Cyprus and so was no doubt an unattractive target for a claim by the Liquidator). By acting quickly an Insolvency Practitioner may well avoid becoming tangled up with a competing application for a Compensation Order. To delay issuing proceedings will be to run the risk that the Secretary of State gets her application off the ground first with uncertain consequences both for the Insolvency Practitioner and for creditors who are deemed unworthy of compensation.