Director disqualification proceedings: Carillion

By Becky Beasley ,

Client Executive (Management Liability) and Product Development Specialist, FINPRO

19/03/2024 · 5 minute read

In October 2023, the Insolvency Service’s (IS) director disqualification proceedings against Carillion’s former directors were dismissed shortly before the trial was due to commence. This article considers the case brought against the non-executive directors (NEDs) and the lessons learnt from a directors and officers liability (D&O) coverage perspective.

Carillion’s collapse

Carillion’s collapse in January 2018 was one of the UK’s biggest corporate failing in decades.The collapse raised fundamental questions about the adequacy of corporate governance and risk management standards in the UK. Following the collapse, investigations and legal proceedings were initiated by several official bodies, including the Financial Conduct Authority, the Financial Reporting Council, the Pensions Regulator, the Official Receiver, and the National Audit Office. There was also a joint inquiry into the collapse of Carillion by two Parliamentary Select Committees.

Proceedings were initially brought against three former directors (the former CEO and two former finance directors) and five NEDs. The IS’s case was that the directors had knowingly caused the company to publish misleading financial statements and had also paid a dividend that was not justified given the financial position of the company. By October 2023, the three executive directors had given disqualification undertakings , leaving the five NEDs as sole defendants.

What are the duties of NEDs?

The Companies Act 2006 makes no distinction between executive directors and NEDs in relation to directors’ duties. However, in practice, NEDs are likely to be held to a lower standard than executive directors when looking at whether they have fulfilled their duties. Unlike executive directors, NEDs are not involved in the day-to-day operations of the company but are responsible for monitoring and challenging the decisions of executive directors.

It is clear from the UK Corporate Governance Code that NEDs have an important role in any company. Responsibilities include reviewing and approving strategic plans, ensuring the integrity of financial information, and monitoring management’s performance.

IS’s case against the NEDs

The IS alleged that the NEDs were in breach of a strict duty to know the “true” financial position of Carillion at all times. The IS said that because the NEDs did not know about the alleged fraud by the executive directors, they were unfit to be involved in the management of the company and should be disqualified under the Company Directors Disqualification Act. This allegation, specifically that there was a strict duty in in these circumstances, was novel. If upheld, it would have led to a reshaping of the duties of NEDs in the UK and would, some commentators have said, have held NEDS to an unrealistic standard.

In response to the allegations, the NEDs argued that the IS’s case did not correctly reflect the law on directors’ duties. A strict duty on NEDs to know the true financial position of the company at all times would go beyond the duty of a director under s.174 of the Companies Act to exercise reasonable care, skill, and diligence in the management of a company’s affairs.

The NEDs further argued that even if a breach of section 174 could be proved, it would still not be enough to justify disqualification under s.6 of the Company Directors Disqualification Act, as the test under s.6 was whether a director was “unfit” to be concerned in the management of a company − a higher standard than negligence. The NEDs argued that the IS had failed to specifically identify any “unfit” actions the NEDs had taken.

The IS’s late decision to drop the case − and the resulting dismissal − raises questions about the strength of their case. It also leaves unanswered questions around NEDs duties, and has led to calls for them to be specifically codified.

D&O coverage considerations following the Carillion case

A D&O policy is essential for responding to multi-faceted investigations brought by regulators as the policy will, subject to terms and conditions, provide cover for:

Defence costs.
Investigation costs, including costs for preparing for hearings and interviews by official bodies.
Settlements.
Civil fines and penalties (where insurable by law).
Additional items, such as public reputation costs, mitigation costs, crisis loss, and emergency costs.

Policyholders should work with their brokers to ensure D&O coverage is as broad as possible and that the policy limit, sub-limits, and any additional limits are sufficient in the event of a large claim. Additionally, key definitions should be continuously reviewed and enhanced. It is important to avoid any onerous exclusions in a D&O policy, such as insolvency exclusions which can be detrimental. Access to D&O cover will be crucial in the event of an insolvency.

Policyholders should try to secure options for extended reporting periods to make sure that after an insolvency event it will still be possible to notify a claim. Clauses relating to transactions should also be closely scrutinised to ensure that they do not unintentionally narrow cover.

Policyholders should seek advice from their brokers in relation to negotiating a ring-fenced additional limit solely for NEDs in the event the primary tower is exhausted. This is likely to be advantageous where there is a full limit loss, and the tower has been “blown” by the executive directors before the NEDs have been able to access the policy.

Cover will always be subject the policy terms, conditions, and exclusions. D&O policies contain a conduct exclusion meaning if there is a finding of deliberate misconduct or fraud, insurers may be able to deny cover for the claim.

Key takeaways

Had the Carillion case proceeded to trial it would have provided clarification on the duties owed by directors and, in particular, NEDs. However, had the IS’s case succeeded, it would have reshaped the duties of NEDs in the UK and exposed NEDs to a much higher, and arguably unrealistic, standard.

This case highlights the importance of robust risk management practices and the need for directors to act in accordance with their legal duties and obligations. Companies should work with their broker to ensure their D&O policy is a broad as possible and consider coverage enhancements, such as the ring-fenced additional limit for NEDs.

Marsh’s new Delta V3 D&O wording includes non-standard investigation cover providing broad cover in the event of an inquiry or investigation. Please contact your Marsh broker for further discussion on this article or your current D&O policy coverage.

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