Stop press November 2019: Directors be Very Afraid. The First Director Disqualification Compensation Order is made – £560,000
The Secretary of State for Business, Energy and Industrial Strategy (SOS) has had the power to not only seek to disqualify a director but also within the same proceedings to seek compensation orders against that director, since 1 October 2015, under Section 15A and 15B of the Company Directors Disqualification Act 1986 (the CDDA). 4 years later and the first director disqualification compensation order has been made for £560,000 in addition to a 15 year disqualification period. In this article we detail the case in which this happened and explain why directors should be very afraid as a result.
The Details of the Director Disqualification Compensation Order Case
In a judgement dated 1 November 2019 , in the case of Noble Vintners Limited (‘Noble’), ICCJ Judge Prentis having disqualified Kevin Eagling as a director for 15 years (the maximum disqualification period), has also ordered Mr Eagling to pay the eye watering sum of £559,484 in compensation to:
- The SOS, for 28 named creditors of Noble in the sum of £460,067; and
- The liquidator of Noble, as a contribution to its assets in the sum of £ 99,416.
This was on any analysis an extreme case of Director misconduct. It is worth noting on the specific facts of this case, that the total compensatory award matched in amount, the amount of income that Noble had received from its customers and that Mr Eagling had then caused Noble to pay to a company controlled by him, without any commercial justification for so doing.
What Evidential Threshold Must be met To Make a Director Disqualification Compensation Order?
The court has to be satisfied that the conduct of the Director:
‘… has caused loss to one or more creditors of an insolvent company of which the individual has been a director’.
How much compensation should be ordered by the court?
The court must have regard to:
- The amount of the loss caused.
- The nature of the misconduct
- What other financial contribution the offending Director has made in recompense for his /her conduct (presumably to somebody such as a liquidator of the insolvent company).
Our immediate comments on this development, from the perspective of the Director, are that:
- Competing financial claims from the SOS and the company liquidator.
We often see claims against directors proceeding at the same time, from the SOS (seeking disqualification) and from the liquidator seeking financial recovery, arising out of the same set of facts. We can easily imagine a situation (now that the SOS can seek financial compensation orders) where those 2 competing financial claims against the Director are in conflict. That situation will need to be carefully managed and negotiated by the Director’s solicitors.
- Reluctance to give Director Disqualification undertakings.
Directors may now be far more reluctant to settle disqualification investigations and disqualification proceedings, by giving Director Disqualification undertakings. The precise terms of any disqualification undertaking will need to be even more carefully managed, moving forwards.
This is an area where very targeted enquiries will need to be made to the SOS, by the Director, as part of his strategy in dealing with the proposed disqualification claim and now, of course, the compensation claim.
- Will the SOS Negotiate a Sum to be Paid in Compensation Ahead of a Court Hearing?
Liquidators of an insolvent company will, in most instances, negotiate financial settlements with Directors targeted by them, taking into account when doing so. commercial and real life factors such as the ability of the director to pay, the merits of the case and the wish on both sides to avoid contested and costly litigation.
Compare that to the position of the SOS, who is tasked to seek disqualification orders ‘in the public interest’. The following issues spring to mind:
- Will the SOS be prepared to negotiate the amount of compensation outcomes, or will the SOS insist on going to a final hearing for the court to make that compensation decision?
- The SOS may, at least in the short term until matters settle down, take the view that it has no ability to negotiate a lower compensatory sum than the SOS believes is due, thus meaning a potentially long , drawn out and expensive court case.
- Has the SOS even got the power and ability to enter into such compensation settlement agreements? Bearing in mind the decision to make a compensatory award is a decision to be made by the court-will we see the court rubber stamping such agreements?
- Will the SOS need to seek approval of a proposed settlement with a Director, from a liquidator of the insolvent company, who may have a competing , financial claim against a director? It would appear so.
- Will a liquidator of the insolvent company, of which the targeted individual was a director, be able to intervene in proposed compensation settlement proceedings? For example, to ensure that the liquidator’s claims are recognised and compensated.
- The interests of different classes of creditors was recognised and appreciated in the Noble case, where the Judge awarded compensation to 28 named creditors, apparently leaving out from that award a number of other creditor claims in the insolvent company.
- We note for example, on the facts of the Noble case, that there were very many more creditors listed as being owed money by Mr Eagling when he signed off the Statement of Affairs relating to the Company, which showed a deficiency to creditors of £1.678million, owed to 122 consumer creditors within that figure.
The trigger for a director to know whether he will face a compensation claim from the SOS is currently to be found in the pre-action letter sent to the Director (‘the Section 16 CDDA letter’).
A failure by the SOS to set out that proposed compensation claim in the Section 16 CDDA letter, is not, however, a bar to the SOS bringing a compensation claim at a later point in time. Great care is thus needed by and on behalf of the director from the outset.
Whilst outside the scope of this piece, the Director also needs to take the necessary steps to ensure that there are no parallel criminal law investigations or proceedings, in place.
Our director disqualification solicitors are well placed here at NDP to advise on these issues. Click here to see some of our testimonials. Please contact us or call us on 0121 200 7040 for a free of charge initial chat.