New Rules for Imposing Personal Liability on Directors of Insolvent Companies
When a company enters into an insolvency process, a director may be made personally liable for an insolvent company’s debts on a few limited bases under the Insolvency Act 1986, the most common of which are:
1. wrongful trading: if the director knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation and he did not take every step necessary with a view to minimising the loss to creditors;
2. fraudulent trading: if a director was knowingly party to the carrying on of the business of the company with intent to defraud creditors; and
3. misfeasance or breach of duty in relation to the company.
If found liable, the director may be ordered to make such contribution to the company’s assets as the court thinks fit.
However, the tests for these claims are often difficult to satisfy and, consequently, there have been relatively few successful claims brought against directors of insolvent companies, leading some critics to demand stronger powers to reclaim from directors who run up debts prior to insolvency.
This may now change with the introduction of new powers for the Secretary of State to pursue a director who has been disqualified from acting as a director as a result of the way he or she has operated the company prior to insolvency. Under new provisions of the Company Directors Disqualification Act 1986 (added by the Small Business, Enterprise and Employment Act 2015), if a director has caused loss to one or more creditors of an insolvent company, the court can order that director to pay compensation as a contribution to the assets of that insolvent company.
The wording of these new powers is very broad. By way of example, the words “caused loss” may cover the situation where a director has given assurances to a creditor, on which that creditor has relied to its detriment, before the company was technically insolvent (so the director would not be liable for wrongful trading) without fraud (so he would not be liable for fraudulent trading) and without being in breach of his duties (so without misfeasance).
Accordingly, once disqualified for whatever reason, these new powers may add significantly to the circumstances in which directors might find themselves personally liable following an insolvency. Moreover, the period during which a director is at risk of a claim being brought against them may be longer than usual in an insolvency because an action to disqualify a director may be brought by the Secretary of State up to three years after the date on which the relevant company entered insolvency (this has recently been increased from two years) and the Secretary of State then has a further two years to bring a claim for a compensation order.
A director will normally seek to protect themself from potential liabilities arising as a result of his acting as director through directors and officers’ (D&O) insurance, but it is not at all clear whether D&O insurance will cover any liability incurred by a director as a result of these new powers as it will largely depend on the wording of the relevant policy. If the policy in question excludes cover for civil and criminal fines or penalties then this may mean that any amounts payable by the director under compensation orders are excluded, although the director’s costs of defending the action may be included.
In addition, the timing of the claim may result in a loss of cover: an action for a compensation order may only be brought after the company has entered into an insolvency process and if the policy lapses as a result, the director may be unable to take advantage of it in respect of a later claim unless it includes sufficient run-off cover. Similarly, if the policy excludes directors who have been disqualified, this may lead to cover for a compensation order being avoided.
This may also be the case for directors’ indemnities, which are prevented by statute from covering a director for liability owed to the company or an associated company or resulting from a criminal fine or regulatory penalty. Also of relevance, where the indemnity has been given by the insolvent company, it may be unlikely that the director could recover any amounts payable by them even if they were covered by it.
The exact reach of these new powers is yet to be seen but, in the meantime, it is important that directors understand the terms of their D&O policies (and their indemnities) carefully and, where possible, seek to ensure that this new area of potential liability is covered.
White Collar Crime Developments in the UK and the US
Late last year, the UK Government saw its first Deferred Prosecution Agreement (DPA). The change in the law, which was introduced in 2014, enabled companies to avoid prosecution if a business admitted wrongdoing, paid a fine or compensation and agreed to overhaul its compliance monitoring. DPAs were heralded as a huge change, which aimed not only to stamp out corruption in the country’s top companies, but also signalled a move towards a US-style system. Over six months on and we have seen just the one DPA – are there more in the wings?
The Serious Fraud Office (SFO), and other regulators, have faced years of budgetary constraints and cuts, which have come in as business crime and global commerce has become even more complex. The UK’s anti-fraud agency has been encouraging more companies to self-report, and many are saying that it may just be too early at this point to say how effective the introduction of DPAs has been.
There is at least one major sticking point in DPA discussions, which is whether certain evidence is protected from disclosure by client privilege – either from in-house or external lawyers. The SFO has signalled its concern that retaining external advisers to investigate risks churning up the crime scene, and this is causing some consternation amongst businesses and their advisers who need to be able thoroughly and swiftly to investigate any alleged wrongdoing.
The US Department of Justice (DOJ) earlier this year announced a one year pilot programme intended to incentivise companies to disclose bribery of foreign officials. However the incentives for self-disclosing in the UK appear less generous than those being offered by the DOJ in their new pilot programme.
The fact that the DOJ has introduced this pilot programme suggests a lack of companies willing to self-report in the US. On this side of the pond the regime has been in place for a far shorter period of time, and lawyers and their clients will be watching the success of the US programme closely.
If it is a success and more companies do self-report and co-operate with the DOJ then there will be a clamour for the UK to follow suit. The UK government will be keen not be seen to be going “soft” on white collar crime, and it will have to provide concrete results from the DOJ programme before it proposes any further changes to UK legislation. The continued success of deferred prosecution agreements may well hinge on the results of the US’s pilot programme.
Trump the Deal-Maker
Looking ahead to his first 100 days in office, president-elect Trump has announced that he will withdraw from the Trans-Pacific Partnership, calling it a potential disaster for the US. This has sent shockwaves throughout the world and prompts the question of what President Trump will mean for cross-border mergers and acquisitions (M&A) transactions. Recent press headlines have focused on the fact that Trump is a deal-maker, but will he be good for deal-making?
Before the election result the prevailing sentiment within the M&A community seemed to be that a win for the Democrat candidate Hillary Clinton would be the preferred outcome. Trump was seen as supporting US protectionism with strong rhetoric on protecting US manufacturing jobs, tearing up trade deals and taxing the import of foreign goods. A Trump victory was also seen as a vote for uncertainty and further volatility in the already choppy waters of the world’s economies, and from an M&A perspective he openly opposed a number of high-profile mergers.
The markets have, however, reacted positively to Trump’s election victory and there are a number of reasons for M&A deal-makers to be encouraged.
In his victory speech Trump struck an unfamiliar, yet welcomed, tone urging both sides to work together for a common goal and to “bind the wounds of division”. Many have suggested that this could be the first indication of a difference between Donald Trump the presidential candidate and Donald Trump the president. Trump is a deal-maker and many believe that it seems logical that such a man will carry his business philosophy into the White House and will fall back on this “deal-making” during his administration. In the context of international M&As, for example, it seems possible that Trump will support the acquisition of US assets by foreign companies if he perceives that they will safeguard US jobs or further the US economy in some way and it seems unlikely that he will not champion trade where to do so would be damaging.
For the first time since 2005 there will be a Republican president, Congress and Senate. Republican parties have traditionally been seen as pro-business and lighter on regulation and Trump has stated a desire to do more to stimulate the US economy, including lowering the rates of tax on US companies and championing large infrastructure projects. With this level of political control it seems possible that such economic stimuli and loosening of regulation could be implemented and this should be seen as a positive move for a world economy that still takes its lead from the US. Large infrastructure projects could lead to cross-border consolidation of some market participants and be good news for deal-makers. Furthermore, a number of traditionally deal-friendly Republicans are likely to be appointed to the Federal Trade Commission and US department of justice, possibly leading to a more relaxed antitrust approach.
M&A activity is often about market confidence and there has been a significant amount of uncertainty over the past 12 months with the Brexit vote and the US elections. Now that these decisions have been made, although not with the outcomes that many expected and with many implications still to be understood, there is a growing opinion that, if the markets remain buoyant, some stability and confidence can return. With the significant amounts of cash in the world’s financial systems, this should provide a sound foundation for positive M&A activity in 2017.
So despite many commentators’ initial concerns about a Trump victory, there are a number of reasons to remain positive in the outcome for M&A activity over the next 12-18 months. We will have to wait and see whether this election result could yet be a Trump card for cross-border M&A.
This article was first published in The Times on 24 November 2016 - http://www.thetimes.co.uk/article/trump-the-deal-maker-78l8zjjg5