IP Briefing: Decision of the English High Court in the case of Re: Noble Vintners Limited
The Factual Background
Noble Vintners Limited (“Noble”) traded as a wine broker, prior to entering liquidation on 22 June 2017. The company essentially made money by buying and selling wine to a number of high net worth individual clients. Following the company’s liquidation, its sole director, Kevin Eagling, was disqualified from acting as a director of a company for the maximum period of 15 years. The reason for his disqualification was that he was found to have caused Noble to incur obligations which it could not meet.
It was alleged that Mr Eagling had paid over the sum of £559,484, which was almost all of Noble’s income over a period of time, to a company controlled by him, without any commercial justification for doing so. Mr Eagling was found to be unfit to act as a director and so was disqualified. The Secretary of State then sought a Compensation Order, in terms of S.15A and S.15B of the Company Directors Disqualification Act 1986, against Mr Eagling. This was the first case of its kind and as such, the judge was keen to be fully addressed on the order sought and the potential disruption to normal priorities of distribution to creditors following recovery under alternative routes set out in the Insolvency Act 1986.
The Statutory Basis for a Compensation Order
S.15A and S.15B of the Company Directors Disqualification Act 1986 came into force on 1 October 2015, yet there has been no case law on this point until now. It was said that these relatively new statutory provisions were introduced with the purpose of providing monetary redress to creditors financially affected by the misconduct of a director, thus giving the existing insolvency regime more ‘bite’. S15A of the Act allows a Compensation Order to be made against a disqualified director of an insolvent company, where their conduct has caused loss to one or more creditors. The Secretary of State has a period of two years, from the date of the disqualification, to make the application. S.15B of the Act allows an order for payment to be made to a specified creditor or class of creditors or as a contribution towards the assets of the company. The court should consider the amount of the loss, the nature of the director’s conduct and whether the person has made any other financial recompense for the conduct, when making an order.
Whilst traditional routes of recovery available under the Insolvency Act involve assessing loss to the insolvent company, Compensation Orders provide the opportunity to assess loss to particular creditors and to recover on that basis. It is perhaps a controversial regime because it goes against the longstanding principle of pari passu distribution to creditors within the same class. Whilst the new regime is of course limited to insolvent entities, its scope is fairly wide in that there is no requirement that the disqualified director was a director at the time of the misconduct, nor that the insolvent company was insolvent at the time of the loss.
In this case, the Secretary of State sought payment of (i) the sum of £460,067 for the benefit of 28 named creditors who had suffered loss as a result of Mr Eagling’s misconduct; and (ii) the sum of £99,416 as a contribution towards the assets of the company. This was allowed by the judge in this case. The court was mindful of the public interest in remunerating office holders but also of the need to allow those creditors who had suffered the most direct loss to be recompensed. The judge recognised that whilst there may be concerns regarding possible ‘double recovery’, the courts would be mindful of any other financial contributions that the director may have (or be at risk of having) to make, in order to prevent this situation from arising. It was recognised that Compensation Orders are sought in the public interest and their effect should not undermine that aim.
Advice for Insolvency Practitioners
Hopefully this decision will be reassuring to Insolvency Practitioners who may have had concerns that this fairly new regime would negatively impact upon more traditional routes of recovery which are of course still available. The court recognised that the purpose of this legislation is primarily to protect creditors who have been particularly affected by the director’s conduct and therefore it is hoped that orders will be sought only in these situations – with IPs retaining the ability to pursue directors, where the Insolvency Act allows.