Case law update
IPA Insolvency Practitioner newsletter, October 2023
An insolvency case law update prepared by Brett Eeles, Associate Director, South West, at Manolete Partners PLC.
Brett joined Manolete in February 2022 and is based in the South West. Previously Brett trained and qualified at the international city firm Norton Rose Fulbright LLP where he worked in the dispute resolution team for six years on insolvency litigation, before moving to Foot Anstey LLP. Brett has a degree in Mandarin and Law and held a secondment in Beijing and also worked in-house at two major banks. Brett specialises in insolvency litigation, fraud and asset tracing and traditionally acts for insolvency practitioners and creditors. He has acted for clients on trials in the High Court, Court of Appeal and Supreme Court.
For this edition of our newsletter, Brett Eeles, Associate Director at Manolete Partners PLC, discusses last month’s decision in The Secretary of State for Business and Trade v Mr Tarquin Barnsby [2023] EWHC 2284 (Ch). The decision is only the second reported case in which a compensation order has been made against a director under section 15A of the Company Directors Disqualification Act 1986 (the “CDDA”).
The CDDA
In certain circumstances the Secretary of State for Business and Trade (“SOS”) can apply under the CDDA for a director to be disqualified. In addition, following the introduction into the CDDA of sections 15A and 15B with effect from October 2015, if the director is disqualified, it is also possible for the SOS to seek a compensation order for the benefit of creditors where those creditors have suffered a loss caused by the director’s misconduct. In Re Noble Vintners[1], the first decision under these new provisions, the Court observed that “Radically, liability is based not on loss to the relevant company but on loss to its individual creditors.”
If the Court is satisfied that the director’s conduct has caused creditors loss there are a range of factors it must consider under section 15B when quantifying the amount of compensation payable including (a) the amount of the loss caused, (b) the nature of the conduct in question and (c) whether the director has made any financial contribution in recompense of the conduct.
Brief background
Mr Barnsby was the sole director of Pure Zanzibar limited (the “Company”). The Company was a travel operator providing safari holidays in Africa. The Company held an ATOL licence. ATOL is a UK financial protection scheme that protects most air package holidays and some flight bookings. It was introduced in the 1970s following the collapse of various high profile travel businesses which left people stranded overseas. It is designed to reassure consumers that their money is safe. It is a criminal offence for a company to undertake certain activities without having a valid ATOL in place.
In March 2017, the Company’s ATOL expired. Mr Barnsby was made aware of this and of the consequences in failing to renew the licence. Despite this he continued to take holiday bookings from customers which should have been ATOL protected but which were not (the “Customers”). The booking forms provided to the Customers included the Company’s ATOL number and ATOL logo, which gave the Customers the impression that their holidays were ATOL protected. The Company was subsequently placed into liquidation. The Customers received none of their circa £80,000 back and, given the very significant deficiency in the liquidation, there was no prospect of any dividend to them.
The SOS brought a claim against Mr Barnsby seeking both to disqualify him and to obtain a compensation order for the benefit of the Customers. The claim was split into two hearings with the disqualification aspect dealt with first. Mr Barnsby was disqualified for seven years. The second hearing dealt with the compensation order aspect. The recent Judgment relates to this second aspect.
Compensation
There is a lengthy discussion in the Judgment as to the appropriate test for deciding whether, under Section 15A, a director’s conduct has caused creditors a loss. In particular, given that sections 15A and 15B represent a new and free-standing statutory regime which must be interpreted as such, whether issues of remoteness and foreseeability are relevant to the issue of causation in this context or not. For example, should a director be liable for the entirety of vast losses caused to creditors even if they were caused by negligence that was relatively minor and/or where some or all of those losses were unforeseeable at the time of the misconduct?
In Re Noble Vintners the Court had applied a test of “using hindsight and common sense, but without considering foreseeability.” However, that case concerned an obvious breach of fiduciary duty by the director (a misappropriation of significant trust funds for his personal benefit) and so was not really concerned with negligence or issues of foreseeability and remoteness of loss.
In the instant case, the Court held that ultimately it did not matter which test was applied (i.e. whether issues of foreseeability and remoteness of loss were relevant or not) because on either basis the creditors losses were plainly caused by the director’s misconduct. It would have been plainly obvious (and therefore reasonably foreseeable) that the Customers’ deposits were not ATOL protected as they should have been and that the Customers would lose them upon the liquidation of the Company.
The Court observed that Mr Barnsby’s conduct had been “woefully reckless and incompetent”, particularly in circumstances where he was the sole director of a company operating in a heavily regulated sector. This conduct had caused losses to the customers and it was easy to quantify that loss by reference to the monies paid to the Company for holidays after the loss of the ATOL licence together with a deposit which should have been refunded to a customer immediately after the licence had expired. The director was therefore ordered to pay compensation totalling circa £80,000 plus interest in respect of these losses.
As an aside, Mr Barnsby had argued that he was impecunious and that a compensation order would therefore serve no purpose. Whilst the Court held this was a factor to take into consideration, it also held that it would rarely be of much weight. Mr Barnsby was relatively young and had the potential for future earnings which could result in some payment of the compensation order. In concluding her judgment, the Judge observed that, “[Mr Barnsby] took the risk with the Customers’ money and must now live with the consequences.”
Comment
The precise scope and nature of the causation test in the context of compensation orders under the CDDA and, in particular, the relevance of foreseeability and remoteness, remains up for debate. The nature of the conduct and particular facts in both of the reported decisions to date have meant is hasn’t been necessary to decide this issue. It will be interesting to see the Court’s approach to the extent any claims for compensation are brought solely on the basis of negligent conduct by the director and where the facts are such that questions of foreseeability and remoteness could make a difference to the Court’s decision.
[1] Secretary of State for Business, Energy & Industrial Strategy v Eagling [2019] EWHC 2806
Content courtesy of IPA corporate partner Manolete Partners PLC.
Please note that guest content does not necessarily represent the views of the IPA.