In this article, we consider the recent case of Secretary of State for Business and Trade v Barnsby (Re Pure Zanzibar Ltd) [2023] EWHC 2284 (Ch), in which a compensation order was made against the sole director of Pure Zanzibar Limited, Mr Barnsby.
The Law
Section 15A of the Company Directors Disqualification Act 1986 states that a director who has been disqualified, either by court order or by offering a voluntary undertaking, can be held liable for all losses attributed to their misconduct by way of a compensation order.
The case of Pure Zanzibar Limited is only the second case concerning compensation orders since they were introduced in 2015, and, usefully, it provides clarity that they can be a tool used by the Insolvency Service in cases of negligent conduct by a director.
The judgment reiterated the purpose of compensation orders. Firstly, to enable creditors to receive financial compensation from a director whose conduct caused identifiable loss but where it was impossible to obtain adequate compensation through the insolvency process. Secondly, to remove the perception that wrongdoers are not held to account, in turn improving confidence in the insolvency regime.
Background
Mr Barnsby was the sole director and 80% shareholder of the travel operator Pure Zanzibar Limited, providing safari holidays in Africa.
From 2015 onwards, due to various factors, the company began experiencing significant financial difficulty and appeared to be heavily insolvent. At the end of March 2017, the company's Air Travel Organiser's Licence ("ATOL") expired. The director, Mr Barnsby, failed to review the licence despite being told by the Civil Aviation Authority that it had expired and the potential consequences for not renewing. However, Mr Barnsby continued to take bookings and customer payments for holidays the company could not provide and where customers thought they were protected through ATOL. Pure Zanzibar Limited still used the logo and old ATOL number to suggest an ATOL license was still in place.
In December 2017, Pure Zanzibar Limited was placed into liquidation. Mr Barnsby was subsequently disqualified for seven years for allowing the company to contravene the Civil Aviation (Air Travel Organisers' Licensing) Regulations 2012 by continuing to take bookings without a valid ATOL.
In addition, the Secretary of State also sought a compensation order against the director.
Decision
On the facts, ICC Judge Barber was satisfied that it was appropriate to exercise her discretion to grant a compensation order for £81,405 plus interest at 1.5% per annum from the date of liquidation.
In reaching her judgment, ICC Judge Barber made the following findings.
- This was a case of "woefully reckless and incompetent conduct on the part of a sole director of a company operating in … a highly regulated framework", which put customers' money at significant risk.
- The director's wrongful conduct caused quantifiable loss to each customer concerned.
- The director had not made any financial contribution in compensation for his conduct.
- As the company had since been dissolved, and in the absence of any distribution to the creditors, the customers had no other means of recovering.
Whilst only the second of its kind, this case demonstrates the court's willingness to grant compensation orders.
As such, it is vital for directors to seek advice when facing an investigation by the Insolvency Service, and specifically before signing a voluntary undertaking. Getting the right advice can protect against compensation orders being made even if disqualification for the director is inevitable.
