A study has found that investigations into directors of insolvent companies are on the rise, with 36% more cases recorded in 2022 compared to the past year. The study, conducted by commercial law firm Reynolds Porter Chamberlain (RPC), found that cases rose from an average of 142 per month in 2021 to an average of 193 in 2022.
The increase in investigations is thought to be partly driven by insolvency practitioners identifying more instances of fraud by directors of insolvent businesses in the reports that they send to the Insolvency Service. The number of cases sent to the service’s compliance and targeting department more than doubled in the same period, from an average of 528 to 1,077 per month.
RPC professional and financial risks partner James Wickes said that the increase in insolvency investigations will likely lead to more director & officer’s (D&O) insurance claims. As these policies often cover the director’s legal costs from facing a formal investigation or legal action, post insolvency actions against these officers have historically been one of the main sources of claims in the line of business.
“With insolvencies on the rise, we can expect to see more instances of fraud and other types of misconduct coming to light. As directors of insolvent companies come under heightened scrutiny, D&O insurers will be anticipating an uptick in claims to cover the cost of investigations or penalties,” Wickes said.
With the world still reeling from the effects of the pandemic, insolvency practitioners have been urged to be on the lookout for any misuse of COVID support schemes, such as the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS). The Insolvency Service disqualified 459 directors during the 2022-23 period for abuse of the schemes.
A separate report, this time from WTW, detailed the top D&O risks that the world at large faces, with economic and cyber risks topping the charts.
What are your thoughts on this story? Please feel free to share your comments below.
