The Insolvency Rules 2016 came into force on 6 April 2017 and seek to modernise the insolvency process. These changes were, in part, brought about by the changes to insolvency law and practice as a result of the Small Business, Enterprise and Employment Act 2015 ("the Act"). Now is therefore a good time to take stock of the other key changes brought about by the Act that were anticipated to impact on D&O claims.
Directors' & Officers' ("D&O") insurance often provides cover for claims against directors involved in insolvency situations. This includes cover for claims made by insolvency practitioners (liquidators and administrators) for wrongful trading, transactions at an undervalue and preference claims. D&O policies would also normally cover the costs of defending fraudulent trading claims, unless there is an admission or finding of dishonest or fraudulent conduct by the director.
Until October 2015, only insolvency practitioners had the right to bring these type of claims. However, the Act allowed insolvency practitioners to assign these claims to third parties, such as a creditor or third party. As well as taking on the cost risk of pursuing a claim, the third party will retain all proceeds of the claim if it succeeds. The effect of the Act is to make it easier for a claim to be made against delinquent directors, but not to introduce any new causes of action.
Wrongful and fraudulent trading claims can be time consuming and expensive to progress. This, along with success fees and ATE premiums no longer being recoverable, means that the assignment of a claim, in return for a fee, may be attractive to insolvency practitioners in some circumstances.
This change was not good news for directors and their insurers. Claims may now be pursued against directors in circumstances where this was previously unlikely. In particular, claims which liquidators may consider not worthwhile, or where there are insufficient funds in the insolvent estate for insolvency practitioners to pursue the claim. Such claims can now be assigned to third parties. These could include disgruntled creditors (or group of creditors), or claims management companies, who are not constrained by duty of insolvency professionals to act in the best interests of creditors when considering making claims. Creditors with an axe to grind may be motivated by different factors meaning that the chances of reaching an early commercial settlement are reduced.
The extent that insolvency practitioners will actually assign claims, remains to be seen. However, the assignment of claims to third parties has not been as widespread as some predicted. Liquidators are under a duty to all creditors to collect and realise company assets. They are also under a duty to investigate the company's affairs, including the conduct of the directors. In circumstances where a claim is likely to succeed, a liquidator is still likely to pursue a claim themselves. However, where there are insufficient funds in the insolvent estate to pursue a claim, or where it may be more beneficial to do so (such as to quickly realise funds for creditors), insolvency practitioners are likely to seek to assign the claims in return for a fee. It is, of course, still possible that claims management companies will seek to take advantage of these changes.
It is too early to tell whether the changes to the Act have resulted in a significant increase in claims, not least because most claims will be settled outside of the court process and prior to the case being reported. However, it remains the case that D&O insurers should be aware of the increased risk of claims being pursued in insolvency situations.