In association with Quantum
Lee Rhodes, director of Quantum Underwriting Solutions, explains the considerable personal risks directors face in their director-level roles due to the threat of insolvency.
An estimated total of 16,502 UK companies entered insolvency in 2016*, a rise of 12.6% on the year before. Whilst this marked increase was mainly due to 1,796 connected personal service companies entering creditors’ voluntary liquidation, it still means that over 14,700 companies entered insolvency in 2016, a rise of 0.3% on 2015 with both voluntary and compulsory liquidations increasing in numbers.
At the point a company reaches any kind of insolvency, the directors are most likely to be the most exposed they have ever been. This is for two reasons: firstly, insolvency often leaves behind disgruntled creditors, investors and employees whom may see the board as responsible for the company’s failure and secondly, the company is very unlikely to possess any assets with which to mount a director’s defence or meet the costs of awards, damages and out of court settlements.
It’s not just the presiding directors that that are exposed. Any retired director that was involved in the business prior to the insolvency, potentially for many years, can be named in an action too.
In addition to legal action from some of the stakeholders already mentioned, there is the added and ever-growing risk of regulatory investigation. HMRC and OFT appear to be taking a much more proactive stance in pursuing potentially culpable directors when companies fail.
The single, most effective way of ensuring support is on hand is by having the backing of Directors and Officers insurance. Whilst a corporate policy will often respond to these kind of actions, how many companies will still have this cover in place at the point of liquidation and beyond? Any Directors and Officers insurance cover needs to be in force at the time a claim is made and this is exactly why having your own personal policy in place can be so important. This kind of policy can be retained once insolvency is imminent and it has the added benefit of covering only you.
Obviously, a policy cannot be started once the company is in trouble: that would be like buying fire insurance when the smoke appears, however, having a personal policy in place well before that point is reached, as a precaution, can be a very prudent measure.
IoD members can access discounts on policies from Chubb Insurance and Quantum Underwriting Solutions, the IoD’s preferred providers of directors’ liability insurances.
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*Source: The Insolvency Service – January 2017. Figures cover companies in England, Wales, Scotland and Northern Ireland.
The views expressed in blogs such as the above are those of the author and do not represent the views of the Institute of Directors.