Investigations into directors of insolvent firms up 36pc

As insolvency numbers rise, so, too, are cases of director misconduct reports – a trend that is anticipated to lead to an uptick in D&O claims.

The average number of cases per month referred to Insolvency Service’s compliance team more than doubled in 2022, whilst investigations launched by the Insolvency Service into directors of insolvent companies for alleged misconduct have risen 36% from an average 142 per month in 2021/22 to an average of 193 per month between 1st April and 31st December 2022, according to data compiled by law firm, RPC.

This increase in investigations is 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.

Insolvency practitioners have also been asked to be wary of Covid support schemes misuse. In 2022/23 the Insolvency Service disqualified 459 directors for abuse of such schemes as the Coronavirus Business Interruption Loan Scheme and Bounce Back Loan Scheme.

As higher interest rates contribute to an increase in insolvencies, directors of insolvent businesses are likely to come under scrutiny for suspected wrongdoing. This may include behaviour, such as continuing to trade whilst being insolvent (wrongful trading) and carrying on the business with the intent to defraud creditors (fraudulent trading).

James Wickes, partner in the RPC professional and financial risks team in London, said: "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. Post insolvency actions against directors has historically been one of the main sources of claims on D&O policies.”

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