For insolvency practitioners, understanding the intricacies of directors’ misconduct and disqualification is crucial. The case of the Secretary of State for Business, Energy and Industrial Strategy V Lord highlights the importance of clearly defining a director’s role and responsibilities, especially when allegations of misconduct are raised.

This is crucial for insolvency practitioners when assessing whether directors have failed in their duties, particularly in cases involving disqualification under the Company Directors Disqualification Act 1986 (CDDA).

It is in this context that funding and insurance can become vital factors. Litigation finance, funding arrangements and insurance allow insolvency practitioners to pursue claims on behalf of their clients whilst reducing financial risks. At Annecto Legal, we can assist clients by helping them secure funding and insurance for director misconduct and insolvency cases.

Secretary of State for Business, Energy and Industrial Strategy v Lord [2022] EWHC 21 (Ch)

In Secretary of State for Business, Energy and Industrial Strategy v Lord [2022] EWHC 21 (Ch), Deputy ICC Judge Paul Greenwood ruled on an application for a disqualification order under section 6 of the Company Directors Disqualification Act 1986 against Mr. Lord, a former director of Asset Land Investment plc.

Asset Land Investment plc was incorporated in 2005, with Mr. Lord appointed as a director in 2006. He resigned in 2012. Nearly five years after his resignation, the company was wound up following a petition by the Financial Conduct Authority (FCA) due to an unpaid interim payment order of £1,270,000.

The initial grounds for Mr. Lord’s disqualification were:

(a) Between March 17, 2006, and May 1, 2012, when he resigned as a director, he permitted the company to operate an unauthorised collective investment scheme; and

(b) During the same period, he allowed the company to mislead the public about its land banking scheme, in which customers invested £4,583,199 with little chance of a return, as local councils had indicated the land was unlikely to be developed, contrary to what investors had been told.

Based on the evidence provided, the judge concluded that while Mr. Lord’s conduct could be criticised in hindsight, there was no evidence to suggest he had entirely neglected his duties as a director concerning the implementation of advice or compliance with FCA assurances. Any partial failure to do so did not make him unfit under section 6(1)(b) of the CDDA.

The second allegation similarly hinged on “abrogation” of responsibility and shifted during the proceedings. The judge noted:

“In my judgment, in all the circumstances, the Secretary of State’s case in respect of the Second Allegation has changed over time, but without those changes being made clear and explicit; it is and has been diffuse and confusing, and in my judgment, in the broad terms in which it was advanced at trial, it was not properly evidenced or fairly advanced. I agree with Mr Lewis, that it is ‘deficient in significant respects’ – it is not for a defendant to disqualification proceedings to search through the evidence in order to assemble the elements of a case that might be alleged.”

Ultimately, the Secretary of State’s claim was dismissed.

The judgment emphasised the importance of procedural fairness and the need for allegations to be clearly stated and substantiated. This serves as a reminder to insolvency practitioners that any disqualification proceedings must ensure the defendant understands the specific allegations against them, allowing them to prepare an adequate defence. Vague or shifting allegations can lead to dismissals and weaken the overall case.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following funding methods:

• After-the-event (ATE) legal insurance– ATE insurance is generally used to protect from adverse costs risks & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award. The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.
• Third party litigation funding– In some cases, third party litigation funders may be willing to provide funding for a claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.
• Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger disputes.

How can Annecto Legal assist?

At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners and liquidators or administrators who are involved in dealing with director misconduct and disqualification matters. If you are in the process of bringing a claim or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.