Corporate Insolvencies Set To Be The Main Driver Of D&O Risk

• Published date: 10 July 2020
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy
• Law Firm: Clyde & Co
• Author: Mr James Cooper

Even before the advent of Covid-19, insolvency-related D&O claims already made up a large part of the management risk landscape.

Corporate insolvencies are on the rise. 2019 saw the highest level of underlying insolvencies since 2013, with the retail, hospitality and construction industries particularly affected. As the ongoing uncertainty of the pandemic further increases the risk that companies will run into financial difficulties, insolvency can only continue to make up a large source of directors' and officers' (D&O) claims.

When insolvencies occur, management decisions in the "twilight zone" (somewhere between the point when the company's financial condition becomes difficult and the commencement of insolvency proceedings) are closely scrutinised. Insolvency practitioners (IPs) are required to investigate and submit reports about the directors to the Secretary of State within three months of the insolvency.

IPs will need to determine whether directors, within the three years before the insolvency, breached any fiduciary duties, insolvency laws (primarily under the Insolvency Act 1986) or company legislation. If the company is listed, directors may also be exposed to actions for breaches of the Market Abuse Regulation, the Listing Rules, AIM Rules, Prospectus Regulation Rules as well as the Financial Services legislation, in particular the provisions on misleading the market.

As a company's pension fund is often one of the largest creditors, there may also be claims from the Pensions Regulator and/or the pension trustees if the conduct of the directors negatively affected the fund. The regulator has extensive investigatory and enforcement powers and legislation is being drafted to bring in severe criminal sanctions for those that mishandle pension schemes.

Despite many businesses being "mothballed" or "hibernating" at the moment, companies will continue to incur liabilities that could lead to a worsening of the creditors' position. Further, companies may file for insolvency prematurely because of directors being fearful that if they failed to do so, they might face personal liability for wrongful trading should the company become insolvent.

However, to alleviate directors' concerns about their potential personal liabilities in such unprecedented times, the UK Government recently enacted the Corporate Insolvency and Governance Act 2020, which, among other things, suspends wrongful trading laws temporarily as a response to Covid-19. It should enable...