Secretary of State For Business and Trade v Barnsby (Re Pure Zanzibar Ltd)

Factual and Procedural Background

This opinion concerns the second part of a claim issued by the Secretary of State ("SoS") on 7 February 2020 against the Defendant seeking a disqualification order under section 6 of the Company Directors' Disqualification Act 1986 ("CDDA") and a compensation order under section 15A CDDA. The disqualification claim was heard over four days, with judgment delivered on 29 April 2022, resulting in a seven-year disqualification order against the Defendant. The compensation claim was directed to be heard subsequently.

The Defendant was the sole director and majority shareholder of Company A, a travel operator providing safari holidays in Africa. Company A held an Air Travel Organiser's Licence ("ATOL") which expired on 31 March 2017. Despite repeated warnings from the Civil Aviation Authority ("CAA") to renew the licence or cease protected operations, Company A continued to take bookings and payments for holidays requiring ATOL protection without a valid licence, using the ATOL logo and number misleadingly.

Company A entered creditors' voluntary liquidation on 19 December 2017 with a significant deficiency and was dissolved on 11 January 2020. The Customers, who had paid for holidays post-ATOL expiry, received no refunds or holidays. The SoS alleged that the Defendant caused or allowed Company A to breach ATOL regulations, fail to refund deposits, and mislead customers regarding ATOL protection. These allegations were substantially upheld at trial.

Legal Issues Presented

1. Whether the conduct for which the Defendant was disqualified caused loss to creditors of an insolvent company under sections 15A and 15B CDDA 1986.
2. Which creditors suffered loss and the quantum of such loss.
3. Whether it is appropriate, in the exercise of the court’s discretion, to make a compensation order against the Defendant.

Arguments of the Parties

Secretary of State's Arguments

• The power to make a compensation order under section 15A is a new cause of action aimed at providing financial redress to creditors harmed by director misconduct not adequately compensated through insolvency.
• The Defendant's conduct was reckless and caused quantifiable loss to specific Customers who paid for holidays without valid ATOL protection.
• The loss suffered by Customers totals £81,405 plus interest, calculated after adjustments for refunds and concessions.
• Causation is established using a test of loss caused by misconduct, applying hindsight and common sense without requiring foreseeability.
• Impecuniosity is not a defence; the Defendant’s financial circumstances and last-minute settlement offer should not preclude a full compensation order.
• The compensation order should be made for the full amount of loss plus interest to reinforce the disqualification regime and protect consumers.

Defendant's Arguments

• The Defendant raised mitigation factors including the impact of external events (Ebola pandemic, Brexit), small company size, and lack of management support.
• The Defendant claimed honest but reckless and incompetent conduct without personal gain.
• The Defendant argued the compensation regime should apply only in cases of fraud, not negligence.
• The Defendant highlighted his poor financial circumstances, low income, and inability to pay a large compensation order.
• The Defendant offered a global settlement of £10,000, warning that refusal would lead to bankruptcy.
• The Defendant challenged causation on the basis of alleged lack of reliance by Customers on ATOL representations and potential insurance recoveries, but provided no evidence.
• The Defendant contended that ability to pay should be a relevant factor in the court’s discretion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Re Noble Vintners Ltd [2019] EWHC 2806 (Ch)	Guidance on sections 15A and 15B CDDA 1986 compensation order regime, including causation and scope.	Used as primary authority for interpreting the compensation regime and causation test; distinguished facts but adopted its approach.
Target Holdings Ltd v Redferns [1996] AC 421	Principles of equitable compensation and causation in breach of trust cases.	Referenced to support the use of hindsight and common sense in assessing causation and loss.
Canson Enterprises Ltd v Boughton & Co (1991) 85 D.L.R. (4th) 129	Removal of foreseeability as a requirement in assessing compensation.	Supported the approach that foreseeability is not relevant in compensation assessment under CDDA.
AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58	Further discussion on causation and compensation principles.	Reinforced the principles of causation and compensation adopted in Re Noble Vintners.
Galoo Ltd and others v Bright Grahame Murray (a firm) [1994] 2 BCLC 492	Principles limiting liability to cases where conduct causes loss, not merely opportunity for loss.	Distinguished on facts; Defendant’s conduct directly caused loss unlike in Galoo.
Sasea Finance Ltd (in liquidation) v KPMG (formerly KPMG Peat Marwick McLintock (a firm)) [2000] 1 BCLC 236	Liability for loss caused by misconduct within regulated frameworks.	Applied by analogy to confirm Defendant’s liability for losses under the ATOL regime.

Court's Reasoning and Analysis

The court began by confirming that the threshold conditions under section 15A CDDA 1986 were met: the Defendant was subject to a disqualification order and his conduct caused loss to creditors of an insolvent company. The losses were limited to five Customers who paid for holidays that should have been ATOL protected but were not due to the Company's expired licence and the Defendant's misconduct.

The court relied on detailed factual findings from the earlier disqualification judgment, establishing that the Defendant knowingly allowed the Company to continue unlawful bookings, failed to refund deposits, and misled customers by continuing to use the ATOL logo and references despite explicit warnings from the CAA.

On causation, the court adopted the approach from Re Noble Vintners, applying hindsight and common sense without requiring foreseeability, but noted that even applying foreseeability would not alter the outcome. The Defendant’s conduct was the sole cause of loss to the Customers. Challenges to causation based on Customers’ reliance or potential insurance recoveries were rejected due to lack of evidence.

The quantum of loss was accepted as the amounts paid by the Customers, less refunds already accounted for. The Defendant had made no recompense.

In exercising its discretion, the court considered the Defendant’s mitigation factors and financial circumstances but emphasized the seriousness of the Defendant’s wilful and reckless conduct in a highly regulated industry. The court rejected the Defendant’s submission that compensation orders should only apply in fraud cases, noting the statutory regime covers negligence and recklessness causing loss.

The court also rejected the Defendant’s offer of £10,000 as derisory and insufficient to benefit the Customers. It held that impecuniosity alone rarely justifies refusing compensation and that the Defendant’s lifestyle choices and potential for future income meant a full award was appropriate.

Ultimately, the court concluded that a compensation order for the full loss plus interest was necessary to uphold the policy objectives of the CDDA compensation regime and to hold directors accountable for misconduct causing financial harm to consumers.

Holding and Implications

The court GRANTED the Secretary of State’s application for a compensation order against the Defendant in the sum of £81,405 plus interest at 1.5% per annum from the date of liquidation.

The compensation is to be collected by the Secretary of State and distributed to the Customers in the specified amounts. The court confirmed that the compensation order regime is intended to provide financial redress for losses caused by director misconduct, including negligence and recklessness, and that impecuniosity is not a bar to making such an order.

No new precedent was established beyond the application of existing principles to the facts of this case. The decision reinforces the accountability of directors operating in regulated industries and supports consumer protection by ensuring compensation where insolvency leaves customers uncompensated.