2022 witnessed a significant number of construction companies (over 3,500) go into administration. A statistic which is expected to intensify, with experts having suggested that the construction sector could see over 6,000 insolvencies within the coming year. It is crucial to consider the implications this trend could have for directors’ and officers’ personal liabilities.

Why are directors and officers at risk?

The rising operational and borrowing costs, coupled with the delay in supplies and forecasted economic volatility has put significant pressure on all companies operating within the construction sector. With the increased risk of insolvency occurring, directors and officers could face personal accountability under the Insolvency Act 1986 if they fail to stop trading whilst in the knowledge that the company would fall into insolvency. 

Senior individuals managing a company are at risk of being personally sued for corporate debts where they have mismanaged a company that becomes insolvent. This could be for either wrongful trading (i.e. trading when they knew the company was heading for unavoidable insolvency) or fraudulent trading (where a director manages a company by defrauding investors, such as paying themselves a salary they know the company can’t afford). If any of the above are found to be breached, the courts can order that director or officer to be personally responsible for all the company’s debts and the possible need to liquidate personal assets to meet the debt obligations. 

Liquidators who are brought in at the point of insolvency will look as far back as three years when compiling their report on a directors’ or officers’ actions for the secretary of state. It is important to note that this may span beyond what the director or officer of that company did in the final stages of the company’s lifecycle, going back a number of years. 

Regardless of whether or not a directors or officer has in fact committed a wrongful act, they may still be required to defend their position, at significant cost, against legal action, be it frivolous or otherwise. 

How can directors and officers protect themselves?

A Directors' and Officers' liability (D&O) insurance policy will normally provide cover for both the liabilities a company’s directors and key managers (officers) are ordered to pay, and the costs incurred in defending them in the courts. However, a number of policies being purchased now contain exclusions relating to insolvency, removing this crucial element of cover in the event of company liquidation. It is therefore crucial that senior management take the time to check their policy to ensure coverage is affirmed. 

Miller’s D&O Construct insurance policy, specifically designed with the UK construction sector in mind, does not contain an insolvency exclusion to ensure this increasing exposure is correctly covered. 

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