Directors and Officers

Compensation orders against company directors: a new way around Limited Liability?

6 April 2020

The case of the Secretary of State for Business, Energy and Industrial Strategy v Kevin William Eagling [2019] EWHC 2806 (Ch) was the first brought by the Secretary of State under a regime in the Company Directors Disqualification Act 1986 providing for compensation orders. The court found in favour of the Secretary of State and made its first ever compensation order under the regime requiring a company director to provide compensation.

What is the concept of “limited liability”?

One of the biggest benefits of incorporating a business and becoming a private limited company is the protection it provides the directors and shareholders from the company’s debts. “Limited liability” affords a layer of protection between the company and its individual directors. This means the directors cannot generally be held personally responsible if the company is unable to pay its debts.

However, the courts have become increasingly concerned that there should be some limit to the limited liability afforded to directors in order to ensure that business dealings remain honest. For that reason, there are certain circumstances where a court will hold the directors personally liable for the obligations of the company.

If a company is struggling and ultimately fails then the directors of the limited company will not normally be held liable for the debts of the company. However, in certain circumstances, the courts can deem one or more directors liable for the company’s debts. A common example of this is where a company has “wrongfully traded” i.e. where a director continues to enter into transactions with the knowledge that the company is insolvent.

The disqualification order regime

When a company enters into any formal insolvency regime (administration, liquidation or receivership), the office holder (official receiver, administrator, liquidator or receiver) is under a duty to scrutinise the behaviour of the company’s director(s) and report to the Secretary of State for Business, Energy and Industrial Strategy. If it appears that the conduct of a director makes them unfit to be concerned in the management of a company, then disqualification action might be brought against said director under the Company Directors Disqualification Act 1986 (“the Act”) to prevent them from acting as director or being involved in the formation, marketing or running of a company for up to 15 years. Unfit conduct might include misappropriating company funds, allowing a company to continue trading when it can’t pay its debts, or not keeping proper company accounting records. A director can defend disqualification proceedings if they refute the allegations or can choose to enter into an agreement to give a ‘disqualification undertaking’, in effect, voluntarily disqualifying themselves from acting as a director.

The main purpose of the disqualification regime is to protect the market from the acts of directors whose conduct falls below expected standards. What the regime failed to do was compensate the victims who had suffered loss as a result of such conduct. Therefore, in July 2013, the Department for Business Innovation & Skills (as it was then known), in order to improve confidence in the insolvency process, first explored giving the court power to make an order compelling a director to financially compensate creditors at the same time as making a disqualification order or accepting a disqualification undertaking. As a result, the Act was amended in 2015 to include new provisions which give the Secretary of State the power to apply for a compensation order against a director to (a) pay an amount to the Secretary of State for the benefit of creditors/classes of creditors, and/or (b) make a contribution to the assets of the company. 

In making the claim for a compensation order and considering whether it is in the public interest to do so, the Secretary of State must have regard to the amount of loss caused, the nature of the director’s conduct and whether a person has already made a financial contribution to compensate for that conduct.

Secretary of State for Business, Energy and Industrial Strategy v Kevin William Eagling – the brief facts

Noble Vintners Limited (“the Company”) traded as a wine broker, dealing in stocks of the most renowned wines. There were three aspects to the Company’s business: it bought stock which it then sold to its clients (usually high net-worth individuals buying for investment purposes); it bought particular wines for clients; and it sold wine on behalf of clients.

The Company was incorporated in June 2011. From November 2015 Mr Eagling was sole director and sole shareholder. On 22 June 2017 the Company entered creditors’ voluntary liquidation with an estimated deficiency of £1,678,614.

On 19 December 2018, the Secretary of State issued proceedings against Mr Eagling seeking his disqualification as a director for 15 years, under section 6 of the Act, and a compensation order. The Secretary of State alleged that between 2 November 2015 and 18 October 2016, Mr Eagling misappropriated funds totalling £559,484 from the Company. Specifically, Mr Eagling was alleged to have recommended to clients that they purchase wine but although they sent payments to the Company, the wine was never received by them; similarly, he recommended that clients sell wine through the Company but they did not receive the proceeds of the sale.

The Judge found that at the time when the Company had very little prospect of meeting its substantial debts it continued to incur obligations, including those generated by Mr Eagling’s recommendations to clients to buy or sell wine, which it very largely did not meet. Instead, during the period between 2 November 2015 and 18 October 2016, the Company paid almost all of its income to a company controlled by Mr Eagling, without any commercial justification. As sole director, the Company acted through Mr Eagling and he was responsible for all of this. Therefore, in May 2019 the court disqualified Mr Eagling from acting as a director, or being involved in the formation, marketing or running, of any company registered in the UK, or an overseas company that has connections with the UK, for the maximum period of 15 years. The Judge also made a compensation order requiring Mr Eagling personally to pay compensation to the Company’s clients in the full amount sought, £559,484.   


Compensation orders represent a significant tool to assist in getting around limited liability in circumstances where directors have acted in a manner that amounts to serious misconduct. However, disgruntled shareholders and creditors might wish that the right to apply for a compensation order were available to them, not just to the Secretary of State (as is currently the case).

What is not yet known is what the ramifications might be for those directors who fail to satisfy compensation orders made against them, particularly those directors who have already been disqualified for the maximum period allowed under the Act (as in this case).

Directors who are faced with the prospect of disqualification and/or compensation proceedings should seek immediate legal advice. There are various issues to consider – should you fight the disqualification proceedings or give a disqualification undertaking? Will giving an undertaking avoid a compensation order? Can you offer to pay money to compensate creditors in the hope that will be for a lower sum than a compensation order? As always, the answers to these questions depend on the facts specific to each case.

Further information

If you have any concerns or require further information about directors’ duties and their potential implications, please contact a member of our directors and officers team.

Latest blogs & news

BEIS White Paper on Audit Reform: will directors take on more personal liability?

In Part 1 of our two-part series on the Department for Business, Energy and Industrial Strategy's (BEIS) White Paper on audit and corporate governance reform (Restoring Trust in Audit and Corporate Governance), we focussed on whether the proposals regarding corporate governance are likely to make the UK a more or less attractive destination for investors.

BEIS White Paper on Audit Reform: Will Kwarteng's reforms really unchain entrepreneurs?

In 2012, as a recently elected MP, Kwasi Kwarteng co-authored “Britannia Unchained: Global Lessons for Growth and Properity”, a political pamphlet which championed risk-taking and innovation in the UK economy, and which ever since has led some to label him a fervent Brexiteer. Appointed as the Business Secretary in January 2021, only a few months later his department (BEIS) published one of the longest and most ambitious government White Papers in recent years.

Is a personality clash in the Boardroom a fair reason for dismissal?

A recent case has highlighted a trend that that we have seen over recent years, with Employment Tribunals finding that the dismissal of a senior executive can be fair where there has been a breakdown in relations amongst a management team and one director / executive is considered to be more at fault (Moore v Phoenix Product Development Ltd EAT/0070/20).  Also, the procedural requirements for such dismissals may be more limited, in this case, the fact that no right of appeal was offered did not render the dismissal unfair.

Ignorance is bliss? Not for directors!

In the recent case of TMG Brokers Ltd (In Liquidation) (also known as: Baker v Staines) the High Court held a director of a company to be jointly and severally liable for payments made by his co-director out of the company’s bank account which were made without proper authority and amounted to  disguised distributions of capital. The fact that he had placed trust in the other director for the company's financial affairs did not excuse him from performing his duties.

FCA Moves to Deregulate SPACs

Following the release of the Hill Report at the start of last month, the FCA has announced that it is going to open a consultation into changing the Listing Rules and connected guidance with a view to encouraging the listing of Special Purpose Acquisition Vehicles (SPACs).

ICSA’s Report on Board Evaluations – A Brief Summary

Following a request by the Department of Business, Energy and Industrial Strategy (“BEIS”) ICSA has prepared a report assessing the effectiveness of the independent board evaluation process introduced in the 2018 update of the UK Corporate Governance Code (the “UK Code”).  

One hand in the cookie jar: Fraud and directors’ duties in insolvency

What happens when a director commits fraud by misappropriating company assets?  Or what of the director who continues trading knowing that the company has no realistic prospect of paying its debts as and when they fall due? To whom does a director owe duties at that point and what recourse is there against that director? This article explores these questions.

Money, money, money: what are directors’ duties in respect of the company’s bank account?

Disputes between directors often arise because of, and/or result in, disputes about company money. Directors need to be alert to how they are required to act, particularly in times of conflict.

Can a De Facto Director be disqualified as a Director?

It is well known that directors owe duties to the company of which they are a director and, in certain circumstances, its shareholders, creditors and employees. Many people believe that if you have not been formally appointed as a director, i.e. you do not appear on Companies House records as a director, you will not owe the usual directors’ duties and, therefore, cannot be in breach of such duties or subject to sanctions for breach.

Fit and proper person requirements for directors in the health and care sector – what does this mean and what are service providers required to do?

All providers registered with the Care Quality Commission (“CQC) must assure themselves that all directors who are responsible for delivering care to service users are fit and proper – in other words, they must be able to diligently carry out their responsibility to ensure the quality and safety of care. This forms part of the providers’ duty to ensure the service is well-led, which is one of the focus points during an inspection. Not only does the CQC monitor compliance at the point of registration, but it is an on-going duty and can lead to enforcement action where it is not met.

Directors’ communications with their solicitors: perhaps not as privileged as you think (Part 2)

In the recent case of Barrowfen Properties Ltd v (1) Girish Dahyabhai Patel (2) Stevens & Bolton LLP (3) Barrowfen Properties II [2020] EWHC 2536 (Ch), the High Court extended the iniquity exception to breaches of a director’s statutory duties.

Insolvency Practitioners: the regulator’s reach is wide when it comes to integrity

It goes without saying that Insolvency Practitioners must behave honestly and with integrity in all their professional dealings.  IPs must handle money and assets in a way which justifies the trust placed in them, but some professionals don’t realise that the way they behave on a Saturday night may be just as relevant to their ability to continue in their chosen profession as the way they behave on a Monday morning.   

Coronavirus business loan scheme fraud

In response to the coronavirus (“COVID-19”) pandemic, the government introduced a number of loan schemes in order to assist businesses struggling financially.  Recent reports suggest that these schemes, as outlined below, have become a target for fraudulent loan applications, by both genuine businesses and also organised criminal enterprises.  This blog briefly examines the various loan schemes in place and the criminal offences which are likely to be the focus of investigating authorities in the coming months.

The driving force fallacy

Court of Appeal overturns injunction in favour of son who sought to restrain his family from participating in the management of their caravan park business - Loveridge –v- Loveridge [2020] EWCA Civ 1104.

Directors disqualified following history of health and safety and waste law breaches

Brother and sister Mark and Rachel Penfold were directors of a waste management company. In February 2016 an employee of the business suffered a serious injury when his arm was caught in a conveyer he was operating whilst at work. The Health and Safety Executive prosecuted the company and both individuals under the Provision and Use of Work Equipment Regulations 1998 (PUWER). 

Director of an insolvent company? Know your exposure…

We live in uncertain and financially very troubling times.  The coronavirus pandemic and the unprecedented measures put in place to tackle it have caused severe disruption to businesses.  Big names such as Harveys, TM Lewin, Intu and the owners of Café Rouge and Bella Italia all went into administration at the beginning of the month.  They will not be the last.

Stretching the limits of Directors’ personal liability for torts?

It is a sad reality that the Covid-19 Pandemic is likely to lead to a spike in the number of companies being put into insolvency.  This has the potential to leave parties with claims against those companies with a reduced prospect of full recovery, even if their claims are strong.  As a result, claimants may look for alternative targets, including ways in which they could sue directors personally. 

Company Succession Planning: Death of a sole director – now what?

Company succession planning is critical to ensure that a company can continue to run in the unfortunate event that a director (or shareholder) dies. If there are other surviving directors, they are able to step in and run the company, but what happens when a sole company director dies?

The impact of the coronavirus crisis on business valuations in divorce settlements

The impact of COVID-19 is being felt in many different ways.  For those going through a separation or divorce, the pandemic has added a layer of uncertainty and stress to an already difficult process. This is particularly so for those who own a business (or whose spouse does), where the value of their business may have been affected and they are concerned with the impact on a financial settlement. In this blog, we look at the complexities of valuing businesses in divorce proceedings at this unprecedented time and provide some practical considerations.

Liquidation and Fiduciary Duties: No Rest for (the Wicked?) Directors

In Hunt (as Liquidator of System Building Services Group Ltd) v Michie & Ors [2020] EWHC 54 (Ch), ICC Judge Barber has confirmed that directors of insolvent companies remain subject to fiduciary duties, even after those companies enter into an insolvency procedure.

Share insightLinkedIn Twitter Facebook Email to a friend Print

Email this page to a friend

We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

Leave a comment

You may also be interested in:

Skip to content Home About Us Insights Services Contact Accessibility