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High Court analyses compensation order regime under the CDDA

accounting Print publication

15/05/2020

The compensation order regime

Compensation orders aim to make directors financially accountable for the consequences of their unfit conduct. They were introduced in October 2015 by the Small Business, Enterprise and Employment Act 2015 which amended the Company Directors Disqualification Act 1986 (CDDA). Under the new regime, the Insolvency Service can apply to court (on behalf of the Secretary of State for Business, Energy and Industrial Strategy) for a compensation order where a director has been disqualified and their behaviour has caused a quantifiable loss to creditors of an insolvent company.

The introduction of compensation orders under sections 15A and 15B of the CDDA, represents a significant departure from the previous approach to directors’ disqualification under the CDDA which was purely directed at protecting the public from the future conduct of directors whose past behaviour had shown them to be a danger. The purpose of the new regime is to provide another route by which victims of inappropriate conduct may be compensated. It is important to understand that this regime is separate and in addition to the wrongful trading provisions of the Insolvency Act 1986 (IA). As such the regime is still available even though the wrongful trading legislation is being temporarily suspended during the Covid-19 pandemnic.

Re Noble Vintners Ltd [2019] is the first case to be brought under the compensation order regime and in granting the compensation order, the High Court considered the scope and interpretation of the legislation and its interaction with the insolvency regime, in particular with regard to the recovery mechanisms and the principles applicable to distributions in an insolvency context.

Facts of the case

The defendant, Mr Eagling, had been the sole director of Noble Vintners Limited (the Company), which entered creditors’ voluntary liquidation on 22 June 2017 owing £1.7 million. The Company had traded as a wine broker, buying and selling wine to wine merchants on behalf of its customers. Between 2 November 2015 and 18 December 2016, Mr Eagling had misappropriated money from the Company in excess of £550,000. The Company received £596,757 as the proceeds of sale of wines owned by its customers or as payment for orders of wine, but made few payments to its customers and made little attempt to fulfil its customers’ orders. As the sole director, Mr Eagling caused almost all the income of the Company, to be paid, without any commercial justification, to another company of which he was the sole director and shareholder.

By an order of 14 May 2019, Mr Eagling was disqualified under section 6 of the CDDA for the maximum of 15 years, for causing the misappropriation of Company funds totalling £559,484. The Secretary of State then sought a compensation order for this amount, to be distributed amongst the customers and creditors of the Company.

Decision

In his judgment, Judge Prentis observed that the regime was intended to “enhance in the public interest the protective aspect of the disqualification regime by giving monetary redress to creditors financially affected by the misconduct, thereby giving the regime as a whole more “bite”, actual and perceived”. In his view the regime should be given the most flexible interpretation possible.

The judge went on to state that section 15A was to be interpreted as creating a new, free standing regime with a single basis for liability (ie with no distinction between its role within the disqualification and insolvency regimes) and liability under section 15B was based not on loss to the relevant company but on loss to its individual creditors. This removed any direct correlation with the remedies available under the IA and potentially also enabled recoveries to be made in cases where there was wrongdoing which caused no loss to the company. This is now particularly relevant in light of the suspension of the wrongful trading legislation. Since it is a free standing regime, it could still be used despite the temporary suspension of the wrongful trading rules under sections 214 and 246ZB of the IA.

When determining the amount of any compensation order, the judge noted that the court must have particular regard to: (i) the amount of the loss caused; (ii) the nature of the misconduct; and (iii) what other financial contribution the person has made in recompense for the misconduct. In the court’s view, the nature of the misconduct would extend to consideration of relative responsibility between multiple directors and permitted the court to balance the claimed loss against the nature of the conduct (for example, where relatively minor yet culpable negligence had caused vast losses).

Judge Prentis found that the misappropriation of £559,484 from the Company had plainly caused a loss to the Company’s creditors. Accordingly, he made a compensation order against Mr Eagling in that amount with £460,067.37 payable to 28 creditors of the Company at whose direct expense Mr Eagling had benefitted, and £99,416.63 payable as a contribution to the assets of the Company. In making this order, the judge observed that Mr Eagling’s misconduct was of the most serious sort, that he was solely responsible for it, and that he was the sole beneficiary of it.

WM Comment

This is the first examination of the compensation order regime and shows that it can be useful in cases where the more traditional route under the Insolvency Act 1986 are either unavailable or unattractive for whatever reason. This is particularly pertinent in the current Covid-19 pandemic. Whilst the Government has announced that directors should not feel obliged to commence some form of formal insolvency process to avoid personal liability where the effect of the pandemic may be that their company cannot, for the time being, pay its debts as they fall due, compensation orders may still be used to prevent (or punish) behaviour that abuses that relaxation.

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