Compensation Orders in Director Disqualification Proceedings – the First Judgment Handed Down in 4 Years since its Implementation under the Regime
In line with the aim of the disqualification regime, to make directors accountable for the consequences arising as a result of their unfit conduct, the Secretary of State may apply to court for a compensation order where a director’s conduct has caused a quantifiable loss to one or more creditors of an insolvent company. An application by the Secretary of State seeking a compensation order must be made within two years of the disqualification and compensation may only be sought for conduct that occurs on or after 1 October 2015.
The principles which should be considered when calculating loss include:
- whether the conduct caused an identifiable loss to one or more creditors;
- the nature of the creditors and whether they have any other forms of redress;
- the ability to readily identify the creditors affected and quantify the loss to each creditor (or class of creditors);
- whether through the insolvency process, for example liquidation, there has been or is predicted to be a (material) repayment to those creditors.
When deciding the amount of compensation, the court will consider whether a director has made any other financial contribution in recompense for the conduct. This means a case for compensation will unlikely be made where, for example, an insolvency practitioner has taken or is going to take civil recovery action against the director or the director has made a contribution to the assets of the company.
On 1 November 2019, ICC Judge Prentis handed down the first compensation order in 4 years since its implementation under the regime.
Background and Decision
On 22 June 2017, Noble Vintners Limited (“the Company”) entered into creditors’ voluntary liquidation. Mr Ealing was the sole shareholder and director.
In December 2018, the Secretary of State issued disqualification proceedings alleging that Mr Ealing caused Company funds in the sum of £559,484 to be misappropriated. A compensation order seeking recovery of the full amount was also sought. ICC Judge Prentis held that Mr Ealing had misappropriated Company funds and unreasonably continued incurring substantial debts in circumstances where these were unlikely to be repaid by the Company. The compensation order sought by the Secretary of State was granted and Mr Ealing was disqualified for a period of 15 years (the maximum period under the Company Directors Disqualification Act 1986).
It was held that the compensation order was to be divided up as follows:
- The sum of £460,067 was payable to the Secretary of State for the benefit of certain Company creditors who, although they did not have priority over any other creditors, had suffered the most direct loss.
- The remainder was payable to the Liquidator of the Company by way of contribution to the Company’s assets.
This judgment may serve to contradict the established “pari passu” principle which underpins UK Insolvency law, namely that all unsecured creditors in insolvency processes must share equally any available assets of the Company or any proceedings from the sale of those assets in proportion to the debts due to each creditor.
The judge provided helpful commentary on various issues, including the following:
- In dividing up the compensation funds, the court has discretion as to whether these should be paid to the insolvent company, to the Secretary of State or to both.
- The regime should not promote double recovery. The following considerations will be relevant to ensuring compliance with the same:
- whether a director has made any other financial contribution in recompense for their conduct, and;
- whether through the insolvency process, there has been or predicted to be a (material) repayment to those creditors.
Should you require any advice or assistance in relation to disqualification proceedings, please do not hesitate to contact our specialist team today on 02074673980.