In the following guest post, Francis Kean takes a look at the new UK Corporate Insolvency and Governance Act and the Act’s potential implications for D&O insurance coverage. Francis is a Partner, Financial Lines, at McGill and Partners. A version of this article previously was published as a McGill client alert. I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.
In March 2020 I wrote an article based on the unusual facts of Re Systems Building Services Group Limited (Systems) in which I asked whether D&O policies needed to be amended to cover post insolvency wrongful acts. Now that we have a new Corporate Insolvency and Governance Act (the Act) in the UK which introduces powerful tools aimed at allowing companies to function and restructure while their directors remain in office, this question assumes even more significance.
The Systems case was unusual because it involved misfeasance both by the insolvency practitioner and the relevant directors post insolvency with the aim of unfairly prejudicing other creditors. The judge concluded that even after a company enters into administration or a creditors voluntary liquidation, directors remain under the same fundamental fiduciary duties imposed by the Companies Act and are therefore subject to the same liabilities. That key finding will undoubtedly also hold true in respect of the new moratorium and restructuring powers under the Act.
A Guide to the New Powers
A thorough account of the provisions of the Act can be found in this briefing by international law firm DLA Piper. In essence, the moratorium provisions allow a company, by filing relevant papers at court, to obtain a grace period of up to 40 days (and more with permission) in which to rescue a company as a going concern. During this time the monitor sits alongside the directors while a moratorium is placed on the creditors’ ability to collect pre-moratorium debts.
The new restructuring powers which need to be exercised under supervision of the court can be used in tandem with a moratorium and provide the directors and the insolvency office holder with pretty much a blank canvass on which to stage a company reconstruction. A useful table produced by DLA shows how this new procedure differs from and is broader than existing procedures. The key D&O insurance coverage point here is that the directors will usually remain in office and potentially liable for wrongful acts during all these processes and throughout the moratorium.
Timing is everything
When a company goes to the commercial D&O insurance market to renew its existing insurance or indeed for the first time, a key focus for insurers (especially in the current hard market) is on the company’s likely solvency over the next 12 months. That is because D&O policies are written on a “claims made” annually renewable basis. Insurers are well aware that the risk of claims against directors in the context of a company insolvency is much greater. They wish to avoid suffering the claims consequences of such an outcome. How well does this cyclical approach to insurance sit with the scheme of the new legislation? Answer: not very!
A central aim of the Act is, in those cases where there are reasonable prospects for corporate rescue, to give insolvency practitioners and the company’s directors the maximum opportunity to achieve that goal. The timing problem is that if the corporate crisis occurs towards the end of the 12 month policy period when the company is seeking to renew its D&O insurance, the directors and the insolvency practitioners may discover that insurers are simply unwilling to provide extended or renewed cover in respect of the critical moratorium and restructuring period. In that event, directors may be understandably reluctant to remain in post.
So What Can be Done?
It is important to understand that the focus here is on wrongful acts which may be committed by directors after an insolvency event. (Quite separately as this earlier article identifies there are a range of other challenges faced by directors in ensuring that there is D&O cover in respect of post insolvency claims relating to wrongful acts which occurred prior to the insolvency event.) There seem to be only two obvious alternatives to this new set of problems:
- Assume either that they will never occur or that if they do, they can be addressed at the time. The benefit of this approach is that it costs nothing and requires no effort. The danger (especially in a hard market) is that this gap in cover, should it arise, may prove difficult to fill.
- Seek to build an optional extension into the D&O wording which is pre-paid (or at least pre-priced) and which allows the directors to extend the liability insurance to cover post insolvency event wrongful acts in the event the directors remain in office by virtue of the exercise either of new powers under the Act or indeed of similar powers under existing insolvency legislation.
The contents of this publication, current at the date of publication set out above, are for reference purposes only and set out the views of the author. They do not constitute legal advice and should not be relied upon as such. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.