Compensation order regime under ss15A and 15B of the Company Directors Disqualification Act 1986

Background

Earlier this year, Mr Eagling was disqualified as a director for the maximum 15 years. He had been the sole director of Noble Vintners Limited (the “Company”). On 22 June 2017, the Company entered into a creditors’ voluntary liquidation, having an estimated deficiency to creditors of £1,678,614.

On 19 December 2018, the Secretary of State issued proceedings. The court was asked to:

1. Disqualify Mr Eagling as a director; and
2. Order that compensation totalling £559,484 be paid to the Secretary of State, with £460,067.37 to be distributed to 28 specific creditors and the remainder paid pro rata to all creditors of the Company.

At the disqualification hearing, the court found that Mr Eagling had misappropriated Company funds totalling £559,484, which resulted in the Company having little prospect of paying its debts. Subsequently, the court made a compensation order on the terms sought by the Secretary of State.

In doing so, the court also considered the interplay between the compensation order regime and the routes of recovery available under the Insolvency Act 1986.

The compensation order regime

Sections 15A and 15B of the Company Directors Disqualification Act 1986 empower the court to make a compensation order against a disqualified director whose conduct has caused one or more creditors of an insolvent company to suffer loss.

The intention of the compensation order regime, as summarised by ICC Judge Prentis in the judgment, was twofold:

1. To enhance in the public interest the protective aspect of the disqualification regime by giving “monetary redress” to creditors financially affected by the misconduct; and
2. To fill gaps in the exploitation of the remedies available under the Insolvency Act 1986.

The compensation order regime differs from the insolvency regime in a key way: liability is based not upon loss to the relevant company, but upon loss to its creditors. In the judgment, ICC Judge Prentis summarised the compensation order regime as a ‘new, free-standing, regime, and must be interpreted as such’.

Implications

In the judgment, ICC Judge Prentis noted that the compensation order regime has been the cause of some disquiet amongst insolvency practitioners and legal commentators. Particularly, concerns have been raised regarding its potential to disrupt the order of distributions prescribed under insolvency legislation and the principle of pari passu distribution that has long applied to English insolvency.

Despite those concerns, the judgment is clear that the compensation order regime is one that has ‘checks and balances at every stage’.

Future proceedings issued under the compensation order regime will be of interest, particularly where the director opposes the claim. In such a case, any creditors of the company will likely want to make submissions to the court as to the appropriateness of any compensation order that it is being invited to make.

Image Source: The Royal Courts of Justice