Carillion NED test case proceedings dropped – A reminder about D&O insurance

The UK Government's abandonment of the case will come as a relief to non-executive directors who feared being held to unrealistic standards

The Insolvency Service (IS), acting on behalf of the Secretary of State for Business and Trade, commenced disqualification proceedings against five former non-executive directors (NEDs) of Carillion plc in January 2021, following the compulsory liquidation of the Carillion Group in January 2018. Last month on the eve of trial, the IS discontinued its disqualification proceedings against the NEDs.

The IS had been seeking to disqualify the NEDs from being involved in the management of any company on the grounds that they did not know the alleged true financial position of Carillion (in particular alleged fraudulent misstatements of group accounts) at all times, including from the date on which they were appointed – ie, a strict liability for the directors.

This was a so called “test case”, running for a number of years, alleging duties which are not consistent with the Companies Act. Notably, there was no action brought against any of the NEDs by the expert regulators on disclosure, the FCA and the FRC.

The costs of litigation of this kind are potentially significant. Where a company is insolvent and its former directors face claims or investigations which the company is no longer in a position to fund, ‘Side A’ directors and officers liability (D&O) insurance cover (which covers directors personally) can be invaluable. Without this, directors may struggle to contest the claims and investigations. While a company may have purchased the cover prior to insolvency, following insolvency it may fall to the directors to take steps to preserve and access their cover. The policy cannot stay in the cupboard until legal fees start to rack up. Directors should consider insurance as soon as a potential issue is on the horizon, notifying insurers of actual or potential claims and seeking their consent to instruct defence counsel and incur costs, as well as providing regular updates as proceedings progress. Taking steps such as these to ensure that D&O Side A cover is available is likely to be important in circumstances where directors are unable to fund the costs of their own defence.

The IS’s abandonment of its case will come as welcome relief for the NEDs as well as to all company directors more widely and the D&O insurance market. Had the IS’s case against the NEDs succeeded at trial, it would have subjected directors, particularly those appointed to large and complex companies, to an almost impossible standard – akin to omniscience extending to every aspect of a company’s business.

For a full analysis of the case by the Herbert Smith team who represented the NEDs see this post on our Litigation Notes blog.