Changes in insolvency law set to affect D&O insurers

Published 16 April 2016

Several provisions of the Small Business Enterprise and Employment Act 2015, which will come into force on 1 October 2015, are likely to have an impact on directors and their D&O insurers. The first key change is that administrators and liquidators will be able to assign insolvency claims, such as claims for wrongful trading, fraudulent trading and transactions at an undervalue, to third parties.

The anticipated impact of this is that such third parties will not be constrained by the usual considerations of an administrator or liquidator such as whether bringing a claim is in the interests of creditors. Taking this into account, together with the fact that the third parties may potentially be better resourced, the result may be that more insolvency claims are pursued against directors.

The second key change of the Act is that where directors are disqualified for misconduct, the court now has the power to order directors to compensate creditors who have suffered a loss as a result of the directors' misconduct. Such compensatory orders may fall within the definition of "Loss" under a D&O policy and may therefore, in principle, be recoverable under such a policy. Insurers may need to consider whether they want to re-word their policies in order to exclude cover for such claims. The period of applying for disqualification of a director has also been extended from two years to three.