Opportunities and challenges facing Directors and Officers (D&O)
Directors & Officers Insurance premiums have seen significant rises over the last 24 months. Market conditions remain tough for this class of business, with the need for insurance buyers to select a specialist Management Liability Insurance Broker more important than ever.
The opportunities and challenges facing directors and officers in 2021 carry with them potential concerns on key issues, including the environment, diversity and the treatment of workers.
It is important to recognise the factors that have arisen as changes to legislation and regulatory investigations carry potential fines, imprisonment and disqualification.
Environment, supply chains and diversity
The environment has become an important focus in business decisions to ensure compliance with regulators around the globe as climate change litigation is increasingly relevant. There is pressure on boards to meet shareholder expectations while also remaining competitive in the market. World-wide there was a drop in securities class actions against non-US listed entities in 2020, however, it has been predicted that a significant number of class action cases could be filed in 2021, with a renewed focus on entities based in Latin America, focusing on the natural resources sector.
The recent Boohoo scandal report from Sir Brian Leveson in the UK criticised the brand for failing to provide “adequate Covid governance” at over a dozen of its factories. This has fixed attention on supply chains and fair treatment of workers, providing them with appropriate working environments and adhering to ethical codes. Companies will need to ensure full compliance with the provisions of the Modern Slavery Act and also by all of its suppliers.
Diversity in the board room has been the subject of numerous studies including research from the University of Toronto that examined more than 6,000 companies listed in the North America. Their study stated that Companies that have diverse boards are less prone to financial restatements and fraud. In the US, it is expected that diversity claims against directors and officers will not match #MeToo claims that allege directors and officers breached their fiduciary duties by creating a hostile work environment and were unjustly enriched by collecting significant remuneration despite alleged wrongdoing.
Phoenixing, care homes and CumEx
The impact of the COVID-19 pandemic has raised the spectre of wide-spread fraud with a suggested £3.5billion of payments under the Coronavirus Job Retention Scheme being claimed fraudulently in the United Kingdom. Around 9m people have been furloughed and records must be kept for six years. One risk for directors is that companies become insolvent, preventing access to documents, or businesses may simply close and reopen under a new name. In response, the Financial Conduct Authority (FCA) has clamped down on consumer investment harm and prevented 12 firms from gaining authorisation following suspicion of phoenixing in the first 10 months of 2020.
There has also been a significant COVID-19 impact for directors and senior managers of care homes. Families of patients and employees who have died from infection are intimating claims for the alleged failure to protect them and contain the virus. While claims for bodily injury are excluded under D&O policies, claims for breach of director duties, including duties under the Companies Act 2006 and health and safety legislation, may potentially see directors personally exposed.
The “CumEx” tax scandal in Germany, according to information provided to several news organizations, could have cost treasuries 55m Euros. As a result, criminal investigations and financial consequences for many institutions will impact on directors. Also, the pandemic and new German insolvency legislation will see a spike in liability risks, especially in the SME sector with the result that new claims related to insolvencies are expected to be filed in 2021.
Significant rulings in Australia and New Zealand
The judgement in April 2020 in Haselhurst v Toyota by the New South Wales Court of Appeal in Australia unanimously ruled that the Court does not have power to make a ‘soft closure’ order in class action proceedings before settlement or judgment creating uncertainty about how claims of non-registered group members can be dealt with in settlement negotiations.
It should also be noted that Crowley v Worley in October last year became the first shareholder class action won by a respondent in Australia, and only the second shareholder class action to go to judgment after trial.
The class actions against NAB, ANZ, Westpac, IAG and Allianz regarding alleged systemic unconscionability appears to have provided a statutory basis for consumers to identify common issues. This was seen in the recent A$138m settlement between group members and IAG over the mis-selling of insurance by car dealerships, one of many actions where statutory unconscionability is a primary cause of action.
In New Zealand, class actions and directors' duties remain under the spotlight with the likelihood of further claims under the reckless trading provisions of the New Zealand Companies Act. In the Debut Homes case, the primary issue was whether a director was in breach of his directors’ duties under the Companies Act 1993. This was the first time the Supreme Court had considered these duties in detail. In the final analysis, the Supreme Court essentially agreed in September 2020 with the High Court decision that Debut Homes Company Director, Mr Cooper breached his directors’ duties and was therefore, personally liable to pay NZ$280,000. The judgement is relevant to directors of all companies in New Zealand.
The need for good corporate governance has been illustrated by a High Court judgement which found four former Mainzeal Property and Construction Ltd directors liable to pay NZ$36m between them for their role in the company's collapse. The court took the view they breached their duties by allowing the company to trade for nine years while it was insolvent.
Directors & Officers should note that the Provisions for a temporary ‘safe harbour’ from personal liability for directors of companies facing significant liquidity problems because of COVID-19 in New Zealand expired on 30 September 2020. As a result, creditors may now look to fund liquidators' claims to obtain some recovery.
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