Protection for execs

and that means sides A and B Cover your assets, directors —

Attorney SARAH COUTTS explains the niceties (and nastiness) of insolvency protection

WHILE the past decade initially saw a decrease in the number of insolvencies, after a peak in 2009, there has been a steady increase once again, particularly in the UK retail, hospitality and travel sectors.

Companies purchase D&O to provide cost protection for directors and officers from investigations and claims which may arise from the decisions taken by them in their capacity as directors or officers of the company they are helping to run. As they can be held personally liable for their decisions, the policy protects their personal assets.

The most notable rise is in the number of Side A claims being made under directors and officers (D&O) insurance policies. There is a growing need to ensure that insured individuals are able to fully access their D&O insurance cover.

Side A provides cover for the personal liability of insured individuals. It is usually triggered if the policyholder company refuses to, or is unable to, protect or indemnify its D&O risks. It may also be triggered in an “insured versus insured” situation if the company has to take action against its own directors or officers. There is no excess payable under Side A, meaning that the policy will provide an indemnity to D&O risks from the ground up.

Side B provides company reimbursement cover, where the company steps in and indemnifies the director or officer in the first instance — either in line with its Articles, due to statute or regulation, or due to prior contractual agreement. Under

Take cover when there is a dispute...

Side B, an excess is usually payable; this is an amount payable by the policyholder company before insurers are liable to provide an indemnity.

There is a significant amount of legislation and regulation setting out the extensive duties and responsibilities directors and officers owe to the company they work for and its shareholders. These include promoting the success of the company, acting within their powers, exercising independent judgement, exercising reasonable skill, care and diligence, and avoiding conflicts of interest.

In a litigious environment, these prescriptive lists of directors’ duties can leave them increasingly exposed to action from a variety of third parties, including the regulators themselves. Globalisation means that international organisations face claims from a variety of jurisdictions, and regulatory activity has increased in the wake of the financial crisis. It is therefore only right for directors and officers to expect the company they run to indemnify them when claims are made against them. While they may have this obligation memorialised in the company’s Articles or by a Deed of Indemnity, in reality that indemnification may not be as forthcoming.

Directors face additional exposures in the event of insolvency, as the duties they owed to the company’s shareholders shift to the company’s creditors, and the creditors themselves will be searching for avenues to recover their resultant losses. A very recent English court decision has confirmed that directors’ duties survive a company’s entry into administration. The director in the claim was found to have breached his duty to act in the

interests of creditors when he purchased an undervalued house owned by the insolvent company, rather than insisting it was sold on the open market.

Regulators will also be taking an interest in the failure of the company, with directors and officers often a key target in investigations which can be long and costly.

Insolvency practitioners consider insurance claims a potential asset in an insolvency and will often look to progress claims against the company’s leadership for wrongful trading, breach of fiduciary duty, fraudulent trading or other misconduct.

While directors and officers may be at risk of adverse actions, once the company enters into insolvency it is no longer able to provide an indemnity to them. They will have to notify and manage their insurance claim themselves to ensure full access.

If there is an actual or perceived conflict between a director or officer’s interests and those of the company, the individual should make a Side A claim. This most commonly occurs where the company is bringing the claim against the director or officer. This may be in the form of a derivative action, one brought by shareholders, acting on behalf of the company, against the individual. Alternatively, the company itself may make allegations directly against the director or officer (for, say, misconduct in office).

Regulatory investigations can also give rise to conflicts, not only between an individual and the company, but between individuals who are identified and questioned by the Regulator in the course of its investigation.

A board dispute may also result in two (or more) insured individuals taking action against one another.

The defence

of one party

can implicate

another

In any of these scenarios, the defence of one party could implicate another party. As a result, the company will not be able to indemnify the insured individuals, meaning that each director or officer will need to make a Side A claim under their D&O policy.

A company may refuse to indemnify its leadership based on reputational reasons. In the current climate of event-driven litigation, such as that arising from the #MeToo campaign, shareholders are increasingly bringing claims against companies and their directors or officers.

The company may not want to be seen to be providing support to an individual who is facing allegations of serious criminal misconduct. Movements such as #TimesUp have amassed legal funds of over $20m to support and finance claims of sexual harassment, which will often target non-offending directors for turning a blind eye to the misconduct.

Side A cover is a critical safety net for D&Os. It is there to fund the costs they incur in defending themselves in investigations or claims arising from the decisions they have made in running a company.

It also covers the amount they may become legally obligated to pay to the claimant/s. Side A cover will also ensure that personal assets of the director. It would be wise to take steps to ensure they are able to access that cover.

If a director or officer becomes the target of a claim or investigation, they should be prepared to seek cover under the policy themselves without the company’s support.

* Sarah Coutts is Complex Claims and Disputes Team advocate, Marsh JLT Specialty

SMEs challenge the system? Rate and pillage: how can

By MARTIN DAVENPORT BUSINESSES on the high street are in trouble, partly due to the current economic climate — but the current rating system is playing a part.

Businesses rates payable equate to almost 50p in the pound each year, and suffer from a complex appeals process.

Struggling businesses need to take creative steps, such as popups stores or multi-use sites, to survive. But to do this they must change the official use of their property (from retail to leisure, for example) and the applicable rate — and this is where they are facing another hurdle.

The rates system known as CCA (Check, Challenge and Appeal) is cumbersome and slow. To submit a challenge, the burden of proof lies with the ratepayer and the process of submitting checks is complex and unpredictable.

This is tricky for unrepresented ratepayers, as there is a requirement for any business to be registered on the government gateway before making an appeal. The process discourages appeals, because of ignorance or the complexity of the system.

One option is converting a former office or retail property into a yoga studio, gym or leisure club. Rateable values are inconsistent as properties like this are valued on their former use. If a yoga studio takes on a former office site, the rates still reflect the office rate.

To achieve a fairer system for SMEs, the “mode and category of use” when valuing property for rating purposes should be taken into account. This would mean more reasonable values in the first place and, over time, encourage businesses to consider innovation. There are some avenues open to SMEs wanting to get their rates reduced. If a business has one property with a rateable value of less than £12,000, it can apply for small business rate relief. This is 100 percent and can sometimes be backdated. The ratepayer can do this via the charging authority and completing a form online.

But it does not immediately benefit to multiple retailers due to the size of the threshold, and EU limit on state aid.

Martin Davenport

To challenge a rate and set up an account on the government gateway is relatively simple. Once registered and with the property claimed, an agent can be appointed, and checks made. These relate to physical factors, not the value of the property.

Once registered, ratepayers can get rates reduced or eliminated during a refurbishment or changeof-use. Appeals for disturbance due to roadworks or building work can be submitted, as well as for splits or mergers.

All supporting documents must be submitted by the ratepayer up-front and, because of this requirement, the Valuation Office Agency (VOA) is more likely to agree the check — a positive aspect of the system.

Following the check process, a challenge can be made. All evidence needs to be submitted at the time of the challenge; should evidence be submitted later, it will not be admissible. If relevant evidence arrives at a later stage, why should it be discarded…?

Despite this, businesses can still work with the system. Central discussions are taking place to check whether the level of rateable value in a number of UK towns and cities is incorrect.

The result should be available soon to those who have participated — and could mean rate reductions back-dated to April 2017.

To further support businesses and encourage fewer empty properties on the high street, there are key changes that the government could consider. These include increasing the small business rate relief threshold to £30,000 rateable value, doubling retail relief to 66 percent, and increasing the rateable value threshold to £100,000. Abandoning any link with EU state aid will also help.

Right now, there does not appear to be much will to change the system, apart from more frequent revaluations. The government is working on the 2021 revaluation with a valuation date of April 1, 2019.

In the meantime, SMEs can navigate the current system by reviewing these options and gaining a better understanding of the processes. Although cumbersome, there is a helping hand during a tough trading period.

* Martin Davenport is partner and head of business rates at Hartnell Taylor Cook and former president of the Rating Surveyors Association