On Saturday (28 March 2020) the UK Government announced certain changes to insolvency laws in response to COVID-19, intended to help companies and directors.
There are two aspects to the changes:
Retrospective suspension or relaxation of wrongful trading
New restructuring procedure and new temporary moratorium
The Government stated that the proposed changes would apply retroactively from 1 March 2020 and has stated it will implement the legislation effecting the changes at the earliest opportunity. Further details of all these proposals are awaited. The full text of the announcement can be found on the UK government website and has been considered by our Restructuring and Insolvency team in detail here.
Implication for D&O Insurance
The Covid-19 outbreak and the associated economic volatility increases the risks faced by directors of companies. There is greater scrutiny of management decisions in times of distress and insolvency is a major driver for claims against directors.
The offence of wrongful trading is a statutory offence under section 214 of the Insolvency Act 1986, which is committed by directors if they permit a company to continue to trade when they have concluded (or should have concluded) there is no reasonable prospect of avoiding insolvent liquidation or insolvent administration. The wrongful trading provisions create significant practical issues for directors in the current dynamic climate in determining when insolvency cannot reasonably be avoided.
Therefore, the government’s proposal to implement a retroactive suspension or relaxation under the proposed measures should be a relief to directors and their insurers and may reduce the number of wrongful trading claims that might otherwise be pursued against them in the future. However, there is a risk that directors of companies which were not viable before the full impact of Covid-19 became clear continue trading and thereby incur additional liabilities for longer than they might have done without the changes. It remains to be seen if there will be anything in the legislation aimed at addressing this concern, beyond the protection afforded by existing rules on fraudulent trading and director disqualification.
Although the detail of the proposed legislation has yet to be released, the proposed relaxation of the wrongful trading rules may result in fewer claims against directors for wrongful trading than would otherwise have been the case (provided the company was not already insolvent before 1 March, which may be a contentious issue). However, the proposed changes are unlikely to alter the position where there is clear and genuine wrongdoing by directors in an insolvency context (e.g. fraudulent trading).