COMPANY LAW - 08.09.2020

Benefit from a compensation order?

A disqualified director was ordered to pay over £500,000 to his company’s creditors, in the first compensation order case brought to court since the regime was introduced in 2015. When can compensation orders be made, and why has it taken so long for the power to be exercised?

Scraping the barrel

Noble Vintners Ltd (NV) provided brokerage services for clients seeking to acquire valuable wines for investment purposes. In June 2017 it went into liquidation with estimated debts of over £1.6 million. The liquidator discovered that Mr Eagling (E), NV’s sole director and shareholder, had made unauthorised payments of almost £560,000 from NV to another company, of which he was also the sole director and shareholder. Meanwhile, his clients were left out of pocket because he had sold their wine stocks or not fulfilled their orders.

Director held to account

Unsurprisingly, E’s serious misconduct resulted in his disqualification in May 2019 for the maximum period of 15 years. The matter did not end there, however, and in November 2019 the Insolvency Service applied for a compensation order (see The next step ). This was granted, and E was ordered to repay the full amount for distribution to the creditors.

Not so new powers

The Insolvency Service’s power to obtain compensation orders was introduced in October 2015. It’s taken a while to filter through because an application can only be based on conduct that has taken place since its introduction. Not only do disqualification and insolvency proceedings take time to conclude, but an order can only be pursued if the funds were not recovered from the director during the insolvency. Tip. If your business has suffered loss because of the actions of a disqualified director, enquire to see if a compensation order is likely to be sought and if you could benefit from it (see The next step ).

Safety net

There is an overlap with insolvency law remedies, such as wrongful trading, which hold directors to account for their conduct. However, these remedies are rarely pursued by insolvency office holders because of the time and costs involved. Compensation orders therefore offer an alternative method of recouping funds for creditors and preventing directors benefiting from their wrongdoing. The scope of compensation orders is also slightly wider, e.g. it covers losses to creditors rather than losses to the company, which could mean better recoveries for creditors. The flexibility of the new regime is yet to be tested in the courts, so it remains to be seen just how effective it is. Tip.  Don’t get overlooked as a creditor, make sure your debt is properly documented and chased up in writing/via email, so it comes to the attention of anyone investigating a director’s conduct.

What it means for directors

The starting point for a compensation order is disqualification, so more directors may be advised to contest disqualification applications, rather than co-operate and give undertakings. Directors who are dealing with insolvency or disqualification proceedings should seek professional advice on their potential liability under a compensation order and whether they should fight disqualification.

For a link to the case and details of the Insolvency Service, visit http://tipsandadvice-business.co.uk/download (CD 21.21.02).

Compensation orders can be applied for within two years of a director’s disqualification. As more cases from the relevant timeframe move through the system, compensation order applications are likely to increase. Contact the Insolvency Service to see if you could benefit from one.

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