Insolvency trends and implications for claims against D&Os and Insolvency Practitioners

Looking into the crystal ball at the start of the year to forecast future trends isn’t possible, but one common theme that we expect will continue to impact upon both directors and officers and insolvency practitioners (IP) is the increasing rise of corporate insolvencies.

The Insolvency Service  recently published its monthly report for insolvencies in December 2023, which reveals an increase in company insolvencies, reaching 2,002 cases – a rise from previous years and pre-Covid 19 times. In contrast, individual insolvencies evidenced a different trend, marking a 20% decrease with 6,584 reported cases in December 2023 as compared to the same month in the previous year. 

The contrasting trends within different insolvency categories is of particular interest. Whilst compulsory liquidations and administrative proceedings saw declines of 18% and 8% respectively, creditors voluntary liquidations and company voluntary arrangements experienced significant increases, with the latter showing a substantial 50% surge. Similarly, debt relief orders and bankruptcies also experienced substantial upticks of 25% and 22% respectively. 

The rise in company insolvencies places continued focus on the role of directors to manage potentially competing interests of their duties owed to the company and the company's creditors. Directors need to be mindful that where the company is insolvent or bordering on insolvency but is not faced with an inevitable insolvent liquidation or administration, of their fiduciary duty to act in the company’s interests and to reflect the fact that both shareholders and creditors have an interest in the company’s affairs. The Insolvency Service's Guidance note, "Director duties upon insolvency" now reflects the Supreme Court's decision in Sequana noting, "If your company becomes insolvent director’s priorities shift from the shareholders to the company creditors."

The rates of director disqualification (which was recently highlighted in the Insolvency Service Annual Report) shows a notable escalation in the number of disqualifications. The number of directors receiving a ban of more than 10 years reached 30.9% last year as compared to 6.0% in 2021-2022 and 8.5% in 2020-21. This increase demonstrates a heightened level of scrutiny and accountability placed on directors for their actions.  

The insolvency statistics also carry implications for IPs as explained by George Smith in our December 2023 Money Covered Podcast. Given the relatively small IP profession (with only around 1,600 licenced IPs in the UK), it is expected that we will see IPs having to take on more appointments. This surge may place a greater strain on IPs, requiring them to handle increased workloads and potentially delegate more responsibilities to junior staff. 

Given the current economic climate a crystal ball is not required to predict that we are likely to see a sharpened focus on the actions of both former directors and any subsequently appointed IPs of companies in financial difficulties by disgruntled shareholders and creditors alike.