Last week the government proposed the following changes to the directors’ disqualification regime:
• company directors convicted of a criminal offence overseas could be disqualified from being a director of a British company;
• the time limit for initiating disqualification proceedings will be extended from two to three years following the insolvency of a company;
• a court could take into account factors such as previous business failures and overseas conduct in deciding whether to disqualify a director;
• a court could order disqualified directors to pay compensation to victims; and
• liquidators and/or administrators will be allowed to assign to a creditor or other third party causes of action that arise on insolvency, such as actions regarding transactions at an undervalue, preferential transactions and wrongful or fraudulent trading.
For Directors’ and Officers’ liability insurers, a change in the law may have mixed blessings; on the one hand we will all welcome a tightening of the regime in terms of those who are permitted to be directors. However, if the time limit for instituting disqualification proceedings is increased, liquidators are allowed to assign causes of action against directors and judges are allowed to take into account a wider range of factors in deciding whether to disqualify directors, there is a risk that disqualification proceedings may increase both in number and complexity, together with an increase in D&O insurers’ exposures to associated defence costs.
D&O insurers should review their policy wording(s) closely to ascertain whether their policies might, inadvertently, respond to any compensation payments ordered by the court to be paid by directors. Further, to the extent any disqualification proceedings are brought about as a result of a director’s previous fraud or misconduct overseas, D&O insurers should check whether the fraud or misconduct was disclosed before placement and/or whether it can be excluded under the terms of the relevant policy.
Current directors’ disqualification regime
Under the current regime the court can disqualify a person from being a director of a company for a specified period up to a maximum of 15 years. Disqualification orders can be made by the court against a director of a company that becomes insolvent, if that director’s conduct has made him or her unfit to be concerned with the management of a company. At present, factors taken into account by the court in assessing whether a director is fit to manage a company are limited to, for example, evidence of any misfeasance or breach of any fiduciary duty by the director in relation to the company.
Proposed directors’ disqualification regime
In measures expected to be brought forward as part of the government’s legislative programme for the next session of parliament (which will be further outlined in the Queen’s Speech on 4 June), the Department for Business, Innovation and Skills stated that, in assessing whether a director should be disqualified, judges may be allowed to take into account factors such as a director’s previous business failures and a director’s previous conduct overseas. Furthermore, as part of the reforms, the Government would be able to ask the court to consider ordering a disqualified director to pay compensation to victims of the director’s conduct.
In addition, the proposals envisage the time limit for initiating disqualification proceedings being extended from two to three years following the insolvency of a company, with liquidators and/or administrators also being allowed to assign to a creditor (or other third party) causes of action that arise on insolvency.
Implications for D&O insurers
At present, the precise changes to the legislation remain unclear and D&O insurers will need to stay abreast of the further details revealed in the Queen’s Speech on 4 June. However, if judges are allowed to take into account a wider range of factors in determining whether or not a director should be disqualified; this may result in an increase in the number of disqualification proceedings or, at the very least, in the strands of investigation that a director will need to respond to, for which the defence costs may be covered under the terms of the applicable Directors’ and Officers’ liability policy. Meanwhile, proposals that envisage liquidators being able to assign causes of action against directors and a longer period of time within which disqualification proceedings can be initiated may also result in an increase in the number of disqualification proceedings and associated defence costs.
D&O insurers should review their policy wording(s) to assess whether compensation awarded against disqualified directors could be capable of falling for coverage, either under the definition of “Loss” within the applicable policy, or as part of the overall defence costs coverage provided by the policy. In addition, to the extent that any disqualification is brought about by virtue of the director’s previous fraud or misconduct overseas, D&O insurers will need to seek comfort as to whether they can rely upon the appropriate exclusion in their policy wording(s) and/or whether the previous conduct was disclosed prior to placement of the D&O policy.
