First disqualified director compensation order – banned directors can now be made to pay creditors

A director has been ordered to pay over £500,000 in compensation to creditors of a company who suffered from his misconduct, in the first compensation order made under the director disqualification regime. Where a disqualification order has been made, the director can now be ordered to compensate creditors, even if the liquidator is unable or unwilling to pursue the director.

The Secretary of State has to make the application, so the number of cases is likely to be limited by the resources of the Insolvency Service. But in egregious but otherwise hopeless cases, where insolvency practitioners probably have no funding to purse director claims, this provides a new route for creditors to make recoveries. It may become routine for compensation to be considered when disqualification proceedings are brought. Where a director gives a disqualification undertaking to the Secretary of State instead of being taken to court, a compensation undertaking can also be sought.

Published guidance on compensation orders indicates that the Secretary of State will not seek compensation orders if that would compete with claims actually being made by the liquidator or administrator. Distribution of funds can either be via the Secretary of State or by payment to the company for distribution by the liquidator.

In this case, Secretary of State v Eagling, relating to wine investments, the director paid all the company’s cash to an associate of his and fled to Northern Cyprus. He was disqualified from acting as director or being involved in business management for 15 years and ordered to pay compensation of £559,484. The court and the Secretary of State were able to direct the compensation to benefit the creditors most directly affected by the misconduct, rather than the money going into a general pool.