The first ever compensation order

Most Insolvency Practitioners will be aware of the ability for the Secretary of State to seek a compensation order against directors under sections 15A and 15B Company Directors Disqualification Act 1986 and the Compensation Orders (Disqualified Directors) Proceedings (England and Wales) Rules 2016.  This was introduced into law in October 2015, and yet the making of the first order took a further four years.

In the case of Secretary of State v Eagling, heard on 2 October 2019, the can be no doubt that ICC Judge Prentis knew that his decision would be of great interest to lawyers, insolvency practitioners, academics and more.  His exceptional judgment was published on 1 November, and here we take a closer look at the key aspects.

The compensation order regime allows the court to make a compensation order against a disqualified director where that director’s conduct has caused loss to one or more creditors of the insolvent company.

In this particular case, Mr Eagling became a director of Noble Vintners Limited in 2015, a wine broker with three areas of business:

- Buying stock to sell to its clients.

- Source particular wine sought by its clients.

- Sell wines belonging to its clients.

The Company went into CVL on 22 June 2017 with an estimated deficiency to creditors in the sum of £1,678,614.

In December 2018, the Secretary of State sought disqualification and compensation orders.  The compensation order was sought for circa £560k, to be distributed with £460k to 28 specific customers, and £100k to the general body of creditors.  This was on the basis that, by 2 November 2015, the Company had no prospect of paying off its creditors, yet it continued to incur further obligations which it could not meet.  Instead, Mr Eagling directed that all the Company’s income was to be paid to another company of which he was the shareholder, without any justification whatsoever.

The court agreed with the Secretary of State’s position, on the basis that Mr Eagling had removed £560k, and that conduct caused the particular loss of £460k to the 28 creditors.  The balance could not be attributed as specific loss to specific creditors, and it was therefore just to order that it be distributed between the general body of creditors.

Whilst this case, subject to the director’s actual ability to pay the order, is no doubt well-received on the whole, there have in the past been academic concerns raised over the potential for “double recovery” as between the secretary of State and claims brought by the office holder. The two regimes run in parallel and are not mutually exclusive.  This was specifically addressed by the judge, who thought that such concerns were “misplaced”.  This was on the basis that “the court is bound to have in mind that no statute should be interpreted so as to impose a double liability”, and further that CPR rule 3.4 would prevent a collateral attack on an earlier decision or other abuse of process.  The courts are keen to ensure that compensation orders are made in the public interest, and with double recovery clearly being against that interest, there is, in the judge’s view, little chance of undermining that principle.  Of course, this does not deal with all the possible conflicts and there are many questions that will have to be resolved on a case by case basis in the future.  

In summary, this is an interesting and welcomed decision.  This new law has been effectively used in a case of blatant misappropriation by a director.  It will, however, remain to be seen whether compensation orders are sought in less straightforward or obvious cases and how in practice the two regimes work.  From the perspective of sensible directors, it is another reason why they should seek insolvency advice when their companies are in the early stages of financial distress.  On the other hand, this legislation is a further weapon against the actions of delinquent directors, where for whatever reason an insolvency practitioner claim is impractical.

For more information, please do not hesitate to contact Alexandra Withers on 0191 232 0283 or ajw@srflegal.co.uk.