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Understanding Directors and Officers (D&O) Insurance Policy in Light of Company Liquidations

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Understanding Directors and Officers (D&O) Insurance Policy in Light of Company Liquidations

Recently, one of the biggest construction firms collapsed, going into liquidation. Issues are reported to have arisen from risky contracts that proved unprofitable, as well as payment delays. This has led to allegations that governance at the company was inadequate and that its board may not have exercised appropriate oversight prior to the collapse, possibly acting in its own interest rather than for the benefit of the company. It has been reported that there was a relaxation of clawback conditions for executive bonuses in the previous year which has led to some top executives continuing to receive substantial salaries and benefits long after their departure from the board.

One of the fundamental duties of a director is to act in good faith, for a proper purpose. The collapse of a company will almost certainly raise questions about the intentions, motives, and beliefs of the directors and whether they put the interests of the company first. Directors may be held to have abused their powers if it is proved they used them to benefit themselves or if they have damaged the company. Breach of such duties can result in directors being held personally liable for the demise of the company, as well as to being disqualified from acting as a director.

If a company becomes insolvent, its Directors are likely to seek coverage under their D&O policy for the costs of defending any investigations into their conduct. Under such policies, insurers can advance costs on a first dollar basis. However, litigation can be costly, particularly if a number of individuals are seeking coverage under the same policy for their own defence.

At Imana Insurance www.imana.co.ke, We recommend that insureds check their D&O insurance coverage, specifically:

  • The policy does not terminate in the event of insolvency, so that executives can access vital defence costs coverage in the event they face allegations of wrongful conduct arising from an insolvency event.
  • Any fraud exclusion only triggers on a final, non-appealable adjudication, so that coverage for defence costs will continue up until the point of a guilty verdict.
  • The D&O programme limits are adequate. Executives should consider the benefits of purchasing a Side A Difference in Conditions policy that will step in to provide “lifeboat” cover in circumstances where the executives are not indemnified by the company and the underlying policy limits have been exhausted or coverage is otherwise unavailable.

Check Your Directors and Officers (D&O) Policy

The fall-out following the collapse of the construction firm has been significant, sparking much discussion. One area that is currently in sharp focus is the impact on directors and officers and their insurance.

The directors and officers of the construction firm are being investigated by a range of regulatory bodies, and also a Parliamentary committee, for allegations of breach of one of their fundamental duties: to act in good faith and to promote the success of the company. Allegations against the board include their failure to adequately oversee and manage the company’s financial situation, as well as their failure to inform the company’s shareholders of its financial problems.

In addition to their duties to the organization and its shareholders, directors have a duty to have proper regard for the interests of the creditors when in a “twilight zone” (the point at which directors would have or should have realized that the company could not reasonably avoid insolvency). It is important to note that one of the major creditors could be the company’s pension fund.

Potential actions against directors following a corporate collapse

As well as a range of different regulatory investigations, a corporate collapse could trigger the following actions:

  • Criminal investigations for allegations of serious fraud/wrongdoing.
  • Civil statutory claims.
  • Formal investigations by the Pensions Regulator.
  • Director disqualification proceedings.

Check Your Directors and Officers (D&O) Policy

In order to provide directors with the appropriate protection in the event of a corporate collapse, a well drafted D&O policy should:

  • Not terminate on insolvency of the company.
  • Cover the costs of investigations, including dawn raids and information requests.
  • Cover the costs of defending disqualification proceedings.
  • Advance defence costs until there is a final, non-appealable adjudication of fraud or criminal conduct.
  • Cover the personal liability of directors for non-payment of corporate taxes.
  • Provide some public relations expenses cover to assist with the reputational fallout.

Imana Insurance www.imana.co.ke experts also advice that executives should consider the benefits of purchasing a side A difference in conditions policy as “lifeboat cover” (i.e. where they are not indemnified by the company and the underlying policy limits are exhausted or coverage is otherwise unavailable). Directors should also be careful to ensure that they comply with the provisions of the Insurance Act in circumstances where they knew or should have known about a potential insolvency prior to the inception of the policy.
A typical D&O policy will not cover directors acting as trustees of the pension scheme this will fall to the pension trustee liability policy.

Conclusion

In a corporate collapse, directors can be held personally accountable for breach of their duties, particularly in situations where the company’s future is at stake. Allegations against them can be brought by a vast number of parties, and could be very costly to defend. Resignation is not an escape – creditors and regulators are likely to persist in their claims, and allegations would follow such directors from job to job. The personal reputational injury for a director could also be irreversible. Access to adequate D&O insurance is essential for directors in times of such a career changing crisis. Imana Insurance www.imana.co.ke can assist you put directors and officer’s policy in place.

Raymond Momanyi is the CEO Imana Insurance Agency Kenya Ltd www.imana.co.ke

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