Two recent headline cases underline the value of directors and officers liability insurance. It would be interesting to see who would finish where in a popularity league table that included Preston North End football club chairman Peter Ridsdale and the directors of Farepak. However, the last few weeks have seen a clear division in their fate following director disqualification proceedings.

The case of Peter Ridsdale

Mr Ridsdale is perhaps best known for his role at Leeds United FC during their rise and subsequent downfall in the early 2000s. He has now given an undertaking barring him from acting as a company director – and from managing or in any way controlling a company – for seven and a half years.

The ban relates to his conduct as a director of WH Sports Group Ltd (WHSG), a company that Mr Ridsdale used to provide sports and leisure consultancy services to football clubs. The undertaking has the same effect as a disqualification order made by a court and is therefore legally binding. In signing it, Mr Ridsdale did not dispute the following facts:

  • Between May 2007 and March 2009, he acted improperly and in breach of his duties to WHSG by channelling £347,000 into his personal bank account when that money had in fact been paid for services provided by WHSG to a football club of which Mr Ridsdale was the chairman
  • He did not disclose the relevant transactions to WHSG’s liquidator, who was subsequently told about them by the football club
  • He failed to ensure that WHSG complied with its statutory obligations to make tax returns and payments to HMRC as and when they were due
  • On three successive occasions, he failed to ensure that WHSG complied with its statutory obligations to prepare and file accounts

The Farepak directors

The outcome in the Ridsdale saga contrasts with the collapse of the case brought by the secretary of state for the Department for Business, Innovation & Skills (BIS) which attempted to disqualify the former directors of Farepak.

Farepak hit the headlines in 2006 when over tens of thousands of its customers lost "deposits" to secure their Christmas and other food and retail vouchers. Fourteen days into the trial, the secretary of state decided to discontinue the proceedings. The judge took the unusual step of issuing a statement which exonerated the directors and criticised the action brought by the secretary of state.

Recently, it has been reported that the Insolvency Service (an executive agency of BIS) faces a legal bill of more than £6m, with £5.1m going towards the legal costs of the Farepak directors who had challenged the ban. Good news for the Farepak directors then, if not the taxpayer.

Comment

These two cases illustrate the importance of D&O cover, with Mr Ridsdale’s ban a high-profile example of the penalties that can be imposed in the highly regulated world in which directors operate. The case against the Farepak directors, on the other hand, points up the costs that can be involved in defending any such regulatory action.

Without D&O cover, a director may have to self-finance any proceedings in which they are involved, or alternatively find a legal representative who is happy to act on a no-win/no fee basis. However, not all directors will be able to afford the first course of action and the no win/no fee option may not always be available. A third source of funding might be the company itself, but this may be unlikely in cases similar to the two present ones.

In a case where a director is seeking cover under a D&O policy in respect of disqualification proceedings, the insurers will need to be satisfied that adequate disclosure was provided before the inception of the policy and that the matter has been notified in compliance with the policy’s provisions. Further, the nature of any allegations made and the proceedings themselves will have to be carefully considered since any findings or admissions of dishonesty or unlawful profit by a director will often justify the withdrawal of insurance cover.

If disqualification proceedings are unsuccessful, D&O insurers may be entitled to recover any indemnity provided should costs be awarded against the Secretary of State for BIS.

Read other items in The Key - Winter 2012