As a broker described insolvency as an “existential threat” to businesses, there is a growing gap between how company directors view the threat to themselves and to the companies they run.
Research by (re)insurance broker McGill and Partners found 74% of board directors named insolvency as their most significant personal liability risk. However, just a 33% see insolvency as the biggest risk exposure to their business.
“The economic environment over the last two years has been particularly difficult for some business with the impact of the Covid-19 pandemic and subsequent restrictions impacting operations and revenue streams,” said the broker. “According to government figures, one in every 304 active companies went into liquidation in 2021, an increase on 2020.”
McGill and Partners warned in the event of an insolvency, much of the responsibility falls on individual board directors. Directors have a non-delegable duty to oversee the affairs of every company, and act in the best interest for the creditors of the business. A breach of this duty can not only carry civil liability but criminal too.
Francis Kean, partner in McGill and Partners’ Financial Lines team comments: “There seems to be a curious mismatch between directors’ assessment of their own personal liability risks arising from insolvencies and that of the companies on whose boards they serve. The reality is that insolvency is an existential threat for companies which government statistics show is increasing due to a range of factors including the pandemic.”
The brokers research said insolvency proceedings are often the time when threats of claims or investigations against directors are at their height, but it can also be the moment at which directors lose the benefit of any company indemnity. In the case of an investigation or claim against a director, the result could be a significant fine, and disqualification from roles and/or industry bodies. Wrongdoing might include a failure from a director to disclose or an attempt to conceal the state of affairs of the company, failure to keep proper accounts or the destruction of the company books.
Kean, added: “Whilst directors accurately assess their own personal liability arising from insolvency risk as high, it is unclear that they understand that many directors’ and officers’ liability insurance policies significantly limit the amount of cover provided for legal expenses incurred in connection with requests of directors for meetings or interviews from liquidators or other insolvency practitioners.”
“It’s therefore vital that directors understand what their D&O policy covers, and crucially if they are still covered in the event of insolvency. It’s far too common that directors don’t understand what their coverage entails, and therefore can find themselves facing significant costs. Every director should understand what their policy includes, the limits, how to access the policy and how to report a claim. To find out this information, speak to your company’s risk manager or the insurance broker.”