In this case study, the outcome was a director disqualification and a compensation order for over £81,000.
Liquidators require directors to complete a questionnaire which will form the basis of information that will need to be reported to the Insolvency Service (IS) under the provisions of the Company Director Disqualification Act, 1986 (“CDDA”). Liquidators conduct their investigations and submit their reports, after which the IS will decide whether the director is fit to continue to be a director or whether a director disqualification investigation or a compensation order (or both) is appropriate. Sometimes the IS do not proceed with a case, at other times the outcome can be quite quick, with a director disqualification undertaking being accepted within months for clear cut cases. However, sometimes, the outcome can take years before the IS make a decision, as they have 3 years from the commencement of the Insolvency to do so.
In this article we report on the case of Pure Zanzibar Limited, a company that organised Motorbike Safari tours in Africa, which went into Creditors’ Voluntary Liquidation, in December 2017. Antony Batty was appointed as the Liquidator, with the 2 outcomes of the case taking 5 and 6 years to be delivered. The court imposed a 7-year director disqualification ban on the director of the company in 2022, with a compensation order being issued in 2023, nearly 6 years after the appointment of the Liquidator.
The details of the case
The sole director of Pure Zanzibar held 80% of the company’s shares and the company held an Air Travel Organiser’s Licence (ATOL) which was issued by the Civil Aviation Authority (CAA).
The ATOL expired on 31 March 2017 and was not renewed by the director, despite warnings from the CAA. As a result, all bookings and payments taken from 1 April 2017 were illegal and the customers were not ATOL protected. The company was also facing financial problems, but continued to illegally take bookings and deposits from five creditors for holidays which it could not then provide as it became heavily insolvent. In October 2017, the director approached the Insolvency Practitioner for advice, and the company went into Creditors’ Voluntary Liquidation on 19 December 2017, owing £517,638 to creditors, including those who had booked holidays, and who did not receive their holidays or a refund. In addition, because of the paucity of assets no dividend was forthcoming to creditors in the liquidation.
The Secretary of State (SoS) sought a director disqualification order against the director under Section 6 of the CDDA, and a compensation order under Section 15A of the CDDA for the creditors’ losses (deposits from 5 holidaymakers) totalling £81,405.
The disqualification claim was handed down on 29 April 2022 which included a disqualification order of 7 years against the director for “woefully reckless and incompetent conduct on the part of a sole director of a company operating in … a highly regulated framework’ and whose conduct ‘put customers’ money at significant risk”.
The compensation order judgement was handed down on 20 September 2023. A compensation order may be made against a director who has caused loss to a creditor of an insolvent company, under Section 5A-15C of the CDDA.
In summary the Judge considered that “substantial,” “criminal” and “continued” breaches of the relevant ATOL legislation was deserving of a compensation order being made. A compensation order of £81,405 plus interest at 1.5% per annum from the date of the liquidation was set on the basis that:
- The defendant’s (the director) wrongful conduct clearly caused quantifiable loss to each of the customers concerned.
- The defendant had made no financial contribution in recompense for his conduct.
- The customers had no other means of making any recovery, the company having now been dissolved with no distribution to any creditors.
Lessons from this case
The Judge noted that the power to make a compensation order is a new course of action that has two aims. Firstly, it enables creditors to receive compensation personally from a director where they have not been adequately compensated by the insolvency process. Secondly, it holds directors accountable in such circumstances and increases confidence in the insolvency regime.
However, there is some concern amongst insolvency professionals that this compensation regime gives a preferential advantage to some creditors (in this case the holidaymakers) over the general body of creditors. Plus, there is the important issue of whether the defendant can afford to pay the compensation order. In this case, the director offered to pay £10,000, claiming inability to pay more.
Finally, the length of time this case took, from the claim being issued to the compensation order being made, would have been a frustration to the parties.
If you, or a client, find you have any issues in this area, please contact us
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