New compensation order regime applied in UK

Background

A judge disqualified a director for paying £559,484 to another company he controlled without any concern for the interests of creditors.

The Secretary of State applied for an order against the director under the 2016 compensation order regime on behalf of certain creditors which, through their trading with the company, had led to the company having £559,484 in cash before the director paid it away.

To qualify for a compensation order, creditors of an insolvent company must have suffered a loss caused by the misconduct of a disqualified director, and the judge agreed that these particular creditors should receive compensation in specific sums, totalling £559,484.

Commentary

• The judge commented that the new regime is "radical" and noted how it potentially upsets the principle of pari passu distribution to creditors on which the English insolvency regime has been based for over 150 years.
• It allows for creditors that meet the test of the regime to bypass recovering their debts through insolvency procedures and make recoveries through an application to court brought by the Secretary of State, instead.
• As a result, the new regime potentially brings into conflict the interests of creditors who might benefit from an application for compensation at the request of the Secretary of State with creditors relying on liquidators and administrators to recover their debts.
• In particular, it could result in the Secretary of State and the liquidator/administrator seeking to enforce against the same assets of a disqualified director concerning broadly the same group of creditors.

Secretary of State for the Business, Energy and Industrial Strategy v Eagling [2019] EWHC 2806 (Ch)

Nick Moser
Alexander Tocili