12 May 2015

New Law Raises Stakes for Company Directors on Insolvency

This article was written by Carl Richards (partner), Wyn Derbyshire (partner) and Cerys Williams (Special Projects Lawyer).

In its dying gasps the last government passed the Small Business, Enterprise and Employment Act 2015 (SBEE 2015), bringing into law a miscellany of provisions spanning various topics. We reported last month on some of the employment issues contained in that legislation but changes in other parts of the new law will impact significantly on the legal and risk landscape for company directors. 

Senior executives understand that taking on a corporate office or directorship involves strict legal duties and accepting responsibility if things go wrong – particularly in an insolvency situation - but the stakes are getting higher. Historically, personal claims against directors have been relatively rare since an insolvent company often does not have sufficient assets to pursue litigation, but changes to be introduced under SBEE could make them much common. The changes include:

  • New route to director liability. SBEE contains an extension of the grounds on which a director can be disqualified and adding a new ability for a court, when ordering disqualification, to also order the director to pay compensation to creditors for the conduct in question. Previously a separate claim would have been necessary. 
  • Extension of right to claim against directors. SBEE allows company administrators to commence claims for wrongful and fraudulent trading against directors.
  • Sale of claims against directors. Importantly, SBEE also allows insolvency practitioners to sell or assign claims against directors to a third party, including claims for wrongful or fraudulent trading. This is highly significant because claims could be assigned, for example, to shareholders, creditors or employees of the insolvent company, each of whom may have more resources and appetite to pursue claims in satisfaction of sums lost in the insolvency. This is a powerful new weapon.

These aspects of SBEE will not come into force immediately but when they do, in our view, they will significantly increase the risk that personal claims against directors will be brought in an insolvency situation.

In light of these changes, it is more important than ever that individuals taking up or already in office should understand and weigh up the risks of their position and seek protection from their employer through appropriate insurance or indemnity arrangements. Blanket commitments to accepting directorships and offices are common in executive service agreements and the prospect of being ordered to accept office in a struggling subsidiary or tenuously funded start up, under penalty of dismissal is now, more than ever, an alarming prospect.  

Likewise responsible employers will be well advised to review their existing arrangements and ensure that their management team is as well protected as possible. Litigation deriving from insolvency can continue for many years and take an exacting toll on those involved. While there are, sensibly, limits to the extent to which corporate officers can or should be protected from responsibility, it would be a mistake to believe that those who have done nothing wrong have nothing to fear. 

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