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Relief for directors at risk of wrongful trading

Financial, Executive and Professional Risks (FINEX)
COVID 19 Coronavirus

By Angus Duncan | April 23, 2020

The most likely exposure to COVID-19-related claims for directors and officers will be for directors of listed companies.

Those companies (and their directors and officers) are most exposed because of the risk of class actions following a drop in the value of the company’s shares, which plaintiffs counsel seek to link to allegedly inadequate or misleading disclosures, or to breaches of duty associated with alleged inadequate director and officer oversight and/or purported failure to incept appropriate risk mitigation protocols.

However, another area of potential exposure for directors and officers has been the risk that one of the knock-on effects of the measures being taken to combat the spread of COVID-19 could be that companies are trading whilst insolvent. This risk has been recognised by the British and various other governments, all of whom have proposed temporary measures to relieve directors from personal liability for trading whilst a company is insolvent (“wrongful trading”).

On Saturday 28 March 2020, the British government announced that it plans to amend insolvency law to give companies breathing space and keep trading while they explore options for rescue1.

The proposal to relieve directors of personal liability for trading whilst insolvent is only one of the measures announced, with others amounting to implementations of measures following a government consultation in 20182.

Other parts of the proposals include:

  • A moratorium for companies giving them breathing space from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure
  • Protection of their supplies to enable them to continue trading during the moratorium
  • A new restructuring plan, binding creditors to that plan

It should be noted that there remain other exposures for directors and the British government has noted that “existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct”.

The steps being taken by all of these governments will, no doubt, be welcomed by the directors of companies as well as their insurers, as it takes away one of the areas where COVID-19 might have increased the D&O exposure.


Footnotes

1 https://www.gov.uk/government/news/regulations-temporarily-suspended-to-fast-track-supplies-of-ppe-to-nhs-staff-and-protect-companies-hit-by-covid-19

2 Consultation on insolvency and corporate governance: government response https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/736163/ICG_-_Government_response_doc_-_24_Aug_clean_version__with_Minister_s_photo_and_signature__AC.pdf

Author

Executive Director
Coverage Specialist, FINEX

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