Amendments to the director disqualification regime, enacted in 2015, enable the Insolvency Service (on the request of a creditor of an insolvent company) to seek a compensatory remedy against a disqualified director for the benefit of the creditor(s). This empowers a creditor to take action where an insolvency officer may be unable, or unwilling, to do so.
In Secretary of State for Business and Trade v Barnsby  EWHC 2284 (Ch) the Court ordered a disqualified former director of a company to pay a sum to the Secretary of State in compensation for losses suffered by certain creditors of the company as a result of the former director's misconduct. The former director, Mr Barnsby, had been disqualified from acting as a director of a company under s. 6 of the Company Directors' Disqualification Act 1986 (CDDA) (a Disqualification Order). Under s. 15A CDDA, where a Disqualification Order is made, the Court may order the disqualified director to pay an amount to the Secretary of State for the benefit of the company's creditors. However, such a payment must be in respect of losses suffered by those creditors that were caused by the director's (mis)conduct.
In this case, the Court was persuaded that the director's wrongdoing had directly caused the losses in question. It also held that the fact that the former director had little money did not mean it was not appropriate to order the compensation payment sought. As this case demonstrates, compensation orders are a potentially powerful tool that can enable out of pocket creditors to pursue the directors of an insolvent corporate debtor. However, such orders are rare - This case is only the second time the courts have considered making a personal compensation order of this kind since such orders were introduced in 2015. There are also some significant hurdles that creditors must pass in order to secure such an order.
Creditors will need to persuade the Secretary of State (through the Insolvency Service) to take the case. They are unlikely to do this if an insolvency practitioner is already taking action against the director in respect of the same conduct, or if the director has already contributed to the company’s assets to compensate for their conduct in the course of insolvency proceedings. The creditor(s) will also need to persuade the Insolvency Service and Secretary of State that the conditions required for an order to be made are met:
- The person seeking the order is a creditor of an insolvent company.
- They have not been adequately compensated in the company’s liquidation or administration.
- The individual against whom the order is sought was, at some point, a director of the insolvent company.
- That individual is subject to a disqualification order or has given a disqualification undertaking.
- The individual’s conduct that led to the order or undertaking being made or given has caused the creditor some loss.
This last condition may be difficult to satisfy in many cases. Our expectation is that the Secretary of State will continue to use the power to seek a compensation order, only sparingly.