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Fraud Insights: First compensation order made against disqualified director

Posted on 02 June 2020

In December 2019, we saw the High Court make the first compensation order under the new section 15A of the Company Directors Disqualification Act 1986 (CDDA 1986) against the defendant director.

In Re Noble Vintners Ltd Secretary of State for Business, Energy and Industrial Strategy v Eagling [2019] EWHC 2806 (Ch), the High Court ordered the sum of £559,484 to be paid by the defendant director of an insolvent company to the Claimant (the Secretary of State) for redistribution to the creditors of the company. A disqualification order had earlier been made against the defendant director for misappropriating that same sum from the company, and thereby causing a loss to its creditors in that amount.

The intention of the compensation regime (introduced by the Small Business Enterprise and Employment Act 2015) is to enhance the protection afforded to creditors of insolvent companies financially affected by director misconduct by providing them (rather than the company) with monetary redress (the value of which is unlimited). Insolvency and Companies Court Judge Prentis in this case described the compensation regime as being a new, freestanding regime which must be interpreted flexibly.

As the first of its kind, the case provides helpful guidance as to identifying the loss caused by director misconduct, determining the amount of compensation and to whom it will be payable. This could include a payment to all creditors, a class of creditors, a contribution to the assets of the company, or some combination.  

The Judge also recognised the likelihood that, as a result of the compensation regime, fewer disqualification cases will settle and there will be more call for court time and resources.

In this case, the Judge found that 28 creditors had suffered the most direct loss, those being the creditors whose debts had accrued after the misappropriation of funds by the defendant director. The Judge held that it was to be borne in mind that the claims of the 28 creditors, not being proprietary, would have no priority treatment over earlier creditors under the Insolvency Act 1986. Nonetheless, the Judge was satisfied that it would be unfair if those creditors, who had suffered the most direct loss, were not independently compensated by the regime in this way.

Hannah Blom-Cooper, a Partner in the Fraud Defence and Business Disputes Group at Mishcon de Reya, says: "The decision highlights the general duties owed by a director to the company, and in an insolvency scenario, to the companies' creditors. Particularly in the current economic climate it is important that directors take proper advice as to how to comply with their duties and, if an insolvency does take effect and a director is notified of a potential disqualification, then the director needs to take proper advice as to the risks of a Compensation Order generally and specifically before considering settling by way of an undertaking."

Bethany Histed, an Associate in the Fraud Defence and Business Disputes Group at Mishcon de Reya, says: "The decision is a warning and reminder to directors that the compensation regime is freestanding and unlimited and that a director's liability under the regime is independent of any liability to the creditors for any loss caused to the company. The decision will be welcomed by the growing body of creditors concerned that the insolvency regime lacks teeth and does not adequately hold culpable directors to account.  However, it remains to be seen exactly how widely the scheme will be used as this case remains the only reported decision of which we are aware." 

See our earlier articles on Compensation Orders from August 2017 and December 2017.

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