Secretary of State For Business and Trade v Barnsby (Re Pure Zanzibar Ltd) [2023] EWHC 2284 (Ch)

Summary

In this High Court case ICC Judge Barber ordered a disqualified director to compensate creditors for losses under s15A of the Company Directors' Disqualification Act 1986 (CDDA) as a result of negligent conduct in trading a company illegally.

Facts

Mr Barnsby was the sole director of the now dissolved travel operator company, Pure Zanzibar Limited (the Company). The Company’s Air Travel Organiser’s Licence (ATOL) expired on 31 March 2017 despite Mr Barnsby having been expressly alerted that he needed to renew it. Despite this Mr Barnsby continued to illegally take bookings and deposits from five creditors for holidays which the Company could not then provide as it became heavily insolvent. The Company was placed into creditors’ voluntary liquidation and the creditors did not receive their holidays, or a refund.

The Secretary of State (SoS) sought a disqualification order against Mr Barnsby under s6 CDDA, and a compensation order under s15A CDDA for the creditors’ losses (deposits totalling £81,405). The SoS argued that Mr Barnsby had caused the creditors’ losses by continuing to trade the Company despite its ATOL having expired.

The SoS claim was issued on 7 February 2020. Judgment for the disqualification claim was handed down on 29 April 2022 which included a disqualification order against Mr Barnsby for a period of seven years for “woefully reckless and incompetent conduct on the part of a sole director of a company operating in … a highly regulated framework' which conduct 'put customers' money at significant risk”.

Judgment was handed down regarding the compensation order on 20 September 2023.

The issues for resolution

1. The conduct relied upon for the making of a compensation order.

2. Whether any such conduct caused loss to any creditors (and if so which creditors and in what sum).

3. Looking at all the circumstances of this case, whether it is appropriate for the court in the exercise of its discretion to make a compensation order.

Ruling and reasoning

1. In summary, “substantial”, “criminal” and “continued” breaches of the relevant ATOL legislation was deserving of a compensation order being made.   

2. Barber J found that the conduct for which Mr Barnsby was disqualified caused loss to each of the customers and quantum was established at the sum of £81,405.
   On the facts, causation here was found to be clear but the judgment contains a helpful analysis on whether reasonable foreseeability should play a part in determining the causation in a directors’ disqualification compensation case generally. Barber J considered the only other claim for a compensation order made by the SoS since Ss15A and 15B CDDA took effect (Re Noble Vintners Ltd [2019] EWHC 2806 (Ch)) which found that causation should be assessed: “using hindsight and common sense but without considering foreseeability the court must be satisfied that the misconduct has caused loss within the meaning of the Act to a creditor of a relevant insolvent company”. She questioned whether the approach on causation taken in Re Noble Vintners (a sole director who misappropriated a company’s funds) should be applied to all directors’ disqualification compensation cases regardless of the nature of the director’s conduct. She considered the example of a director disqualified for negligent conduct and concluded that “it is difficult to see why, as a matter of principle, foreseeability should not play a role when considering the issue of causation”. Barber J ultimately didn’t feel it was necessary to consider foreseeability and other common law principles of remoteness on the facts of this case as the cause of the loss to the customers was clearly Mr Barnsby’s conduct. However her comment that there “may be other cases in the future which warrant fuller debate on whether the same approach on causation is appropriate in all directors' disqualification compensation cases” opens the door to common law principles of remoteness being applied.

3. In considering the court’s discretion, Barber J rejected the submission that compensation orders should only apply to fraud, affirming that the compensation order regime covers cases of negligence or recklessness as well. She accepted that the Court retained a discretion on whether or not to grant relief under s15A CDDA, however considered that, when having regard to the policy objectives underlying the legislation (as well as the submissions of both parties) the appropriate course in the exercise of her discretion was to grant a compensation order in an amount representing the full loss of the relevant customers together with interest at 1.5% from the date of liquidation.

Comment

This is only the second compensation order made since Ss15A and 15B CDDA took effect in October 2015 and has provided some degree of confidence that they can be made in cases of negligence. As a detailed interrogation on the matter of causation was not considered necessary in this case, it will be interesting to note if the position adopted in Re Noble Vintners Ltd will be adopted moving forward or whether losses which are merely reasonably foreseeable consequences of a director’s negligence may also fall within the compensation regime.

It is also helpful to note ICC Judge Barber’s comments on the matter of Mr Barnaby’s impecuniosity when considering the exercise of her discretion to grant a compensation order. Specifically that whilst, in principle, a director's resources (or lack thereof) may be a factor to take into account “…impecuniosity, without more, will very rarely weigh heavily in the balance when the court considers, in the exercise of its discretion, whether and if so in what sum to grant a compensation award.” Indeed ICC Judge Barber concluded (in this regard) that “the court should be slow to allow mere impecuniosity, of itself, to dictate the outcome of a s15A application; particularly where, as here, that impecuniosity is, in part at least, a result of lifestyle choices freely adopted.”

Tim Carter, Co-Head of Restructuring & Insolvency at Stevens & Bolton, comments: We wrote in 2019 about the first case, Re Noble Vitners, brought by the SoS under the CDDA, and wondered then whether we would see more orders made going forward. It is interesting that it has taken a number of years for a second decision to materialise – the length of time between the issuance of the claim and the compensation order being made in this case must be a frustration. Similarly to Re Noble Vitners, the lack of a distribution otherwise to the general body of creditors of the Company means that are no issues of recoverability in terms of any compensation paid to these creditors, but the interaction of the compensation regime and available remedies under the Insolvency Act might  be more complex in situations where the company does enter an insolvency process and there is the possibility of a distribution, or actions are pursued against the director(s) under the Insolvency Act. With the SoS’ resources surely stretched even thinner now than they were in 2019, it will remain to be seen how much appetite there is for bringing such further claims for compensation.