- There is a link between increasing risk of business insolvencies and the exposure of company directors and other senior employees. In particular, directors may be exposed to wrongful trading and misfeasance claims.
- Directors’ and officers’ / management liability policies (D&O/ML) policies will ordinarily cover such liabilities, subject to their terms and conditions, but care needs to be taken over the limit of indemnity in light of the sums with which the director is accustomed to dealing with in the context of the business.
- Consideration ought also be given to the scope of the cover overall, and this should be regularly reviewed, for example to ensure that it provides cover to each relevant individual in the capacities in which they act.
Context: business insolvencies and claims against directors & officers
The UK government has a difficult task on its hands. Public sector net debt is hovering around 100% of GDP (Public sector finances, UK – Office for National Statistics ). GDP growth is anaemic, and given the stubborn inflation hanging around in the economy, the Bank of England is adopting a cautious approach in the lowering of interest rates (holding rates at 4.5% following the 20 March 2025 Monetary Policy Committee meeting). In an era no longer marked by historically low interest rates of near zero (which prevailed during the period following the 2008 financial crisis right up until the onset of Covid-19), borrowing costs remain high for businesses. It may be no surprise therefore that insolvencies are on the rise across the economy. The challenges for business are only likely to increase when the Autumn Budget changes take effect, in particular the reduced threshold and increased rates for employers’ NICs.
When insolvencies rise, so do claims against directors. Government data published on 18 February 2025 notes that there were 1,971 company insolvencies in January 2025, which is 6% higher than in December 2024, and 11% higher than the same month in the previous year (1,780 in January 2024, Commentary – Company Insolvency Statistics January 2025 – GOV.UK).
This is the first of a series of articles looking at the coverage available under D&O/ML policies. In this article we examine directors’ duties when insolvency is on the horizon, considered through the prism of the 2024 BHS case Wright and Rowley, BHS and others v Chappell and others [2024] EWHC 1417 (Ch), and consider how the decision in BTI 2014 LLC v Sequana SA [2022] UKSC 25 feeds into that case as regards the creditor duty. First, however, we briefly set out what would fall within the remit of D&O cover.
Insurance coverage: the usual scope of D&O/ML cover
D&O/ML policies indemnify directors and officers for losses they incur as a result of ‘wrongful acts’ carried out in the course of their duties as an ‘insured person’ (often referred to as acts carried out in their ‘insured capacity’). The same cover is also frequently afforded to other key individuals in the business such as those in managerial positions, as well as former insured persons and others such as spouses and estates of insured persons.
It is important to understand what is meant by ‘wrongful act’. The definition in the policy will normally be widely worded to include any actual or alleged breach of duty, neglect, error, mis-statement, omission, breach of warranty, breach of authority or other act wrongfully attempted or committed. It is a broad definition which has the effect that D&O/ML policies are generally seen as all risk covers: they will cover directors, officers and others carrying out management responsibilities for breaches of duty committed in the course of carrying out those roles subject to policy exclusions.
Indemnity will be for ‘loss’ incurred by the director concerned, which will usually also be widely defined in the policy to include defence costs, legal representation costs, awards of damages and settlement amounts, and claimant’s costs (if the insured person is liable to pay them).
The insolvency-related liability issues
Many of the claims under D&O/ML insurance tend to relate to breaches, or alleged breaches, of duties that directors owe to the company under the Companies Act 2006 (“CA 2006”). These are set out in s171-177 of the CA 2006, but broadly include the need for directors to:
- Act within powers (s171).
- Promote the success of the company (s172).
- Exercise independent judgment (s173).
- Exercise reasonable care, skill and diligence (s174).
- Avoid conflicts of interest (s175).
- Not accept benefits from third parties (s176).
- Declare transactions in proposed or existing arrangements with the company (s177).
Insolvency and breach of the above provisions can of course also be a trigger for investigations into directors, and investigations cover under D&O/ML policies will be considered in a later article in the series.
The BHS case
Directors of companies that get into financial distress or an insolvency scenario need to be particularly mindful of the duties under s171-s177 of CA 2006. These duties under the CA 2006 however can also interact with the duties under the Insolvency Act 1986 (“IA 1986”). This is highlighted by the recent High Court judgments involving the former BHS directors which were handed down on 11 June 2024 and 19 August 2024, after the group went into liquidation in 2017. In 2020 the liquidators of BHS issued claims against the group’s former directors in order to recover money for creditors. The liquidators brought claims against the former directors under the IA 1986, specifically under sections 212 and 214:
- ‘Wrongful trading claim’ (s214 IA 1986).
- ‘Trading Misfeasance claim’ (s212 IA 1986).
The wrongful trading claim
The liquidators successfully established that there came a point, well before they put the company into administration, that the directors knew (or ought to have known) there was no reasonable prospect of the company avoiding insolvency, but continued trading anyway – causing loss to creditors (the basis of a wrongful trading claim). The directors (Mr Chandler and Mr Henningson) were found personally liable for £6.5 million each in the wrongful trading claim.
The misfeasance claim
As regards the misfeasance claim, under s212 IA 1986 a liquidator can enforce an existing cause of action which the company has against a director. In this case the liquidators argued amongst other things that the directors failed to consider the interests of creditors under section 172 CA 2006. In a previous judgment, Sequana, the Supreme Court held that when a company is insolvent or insolvency is probable, the directors’ duty under section 172 CA 2006 is modified so that directors have to consider the interests of the creditors as a whole.
Trading beyond that point by taking on onerous financial obligations was not adequately considering the interests of creditors. This was the basis of a further breach in the BHS case. The directors had D&O/ML cover but it was limited to £20 million. The judge declined to limit the liability of the directors to £20 million, instead ordering Mr Henningson and Mr Chappell (the latter by this point bound by the judge’s findings from the 11 June judgment) to pay £110 million on a joint and several basis. The Judge noted, unsurprisingly, that directors could not escape or reduce liability based on their decisions about levels of D&O/ML insurance. In particular Mr Justice Leech at paragraph 1149 of the judgment noted that “even if they do not have adequate cover…I decline to exercise my discretion to reduce the amount for which I declare them to be liable”.
Mr Justice Leech agreed with Counsel for the Applicants that to agree to limit cover to £20 million “would be to send the wrong message to risk-taking directors that they could escape liability if they did not obtain adequate cover to indemnify themselves for wrongful trading”.
This is a clear warning that quantum will not deter a principles based approach, and sufficient/higher limits of indemnity are therefore an important consideration for directors (the judge noting in BHS that there was no evidence before him about why cover was placed / limited to £20 million, a level which was insufficient for the sums the directors were routinely dealing).
Implications of the BHS case
- Directors should regularly monitor their duties, and assess whether the knowledge condition as regards a potential wrongful trading claim, could be satisfied. The knowledge condition being, as referenced in the BHS judgment, the point in time at which the director/s knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or enter into insolvent administration;
- Directors should take professional advice as regards whether they may fall into wrongful trading territory, or may be breaching their duties to creditors, and act on such advice, rather than merely request it to evidence that advice was sought;
- Directors should document their decision making for audit purposes; and
- Directors should obtain adequate D&O/ML cover, and familiarise themselves with what that cover entails.
Conclusion
Given the current economic environment, insolvencies are on the rise, and directors need to consider their liability cover. Even where there is no manifest wrongful trading or misfeasance, a challenging trading environment can lead to casualties, and (whether merited or not) claims can emerge against directors which need to be defended.
It is also worth noting (as evident in the Sequana case) that claims can surface years after a director has left a company. Run-off cover should therefore be considered, if a measure of certainty cannot be achieved about whether the company’s D&O/ML programme will insure former directors in the future. This is because under normal limitation rules, claims against directors can be brought up to six years from the date of the alleged breach (and sometimes more). This means that directors may need D&O/ML cover for years after they leave a company because claims can still be made and it is often the policy in place at the time of the claim that will respond.
Finally, consideration should also be given to the scope of cover, i.e. ensuring that the provisions of the policy are suitably wide. At Indemnity, we frequently see questions posed to directors by insurers concerning whether an individual qualified as an insured person and whether they were acting in an insured capacity. These issues can often be addressed when a claim arises, but some develop into disputes with insurers, which may be avoided by giving thought to the scope of cover with your broker at the underwriting stage.
