Directors beware: Key legal shifts in 2024 and what’s ahead for 2025

The legal landscape for directors and officers (D&O) underwent significant developments in 2024, with court rulings and regulatory changes raising the stakes for company leaders and their insurers.

The landmark case against former directors of BHS Group introduced the concept of "misfeasant trading," holding directors personally liable for failing to prioritize creditors' interests during insolvency. Meanwhile, the FCA sharpened its focus on non-financial misconduct, signalling a stricter stance on workplace culture and accountability.

As these changes reshape liability risks and compliance expectations, directors, officers, and D&O insurers must navigate a more precarious environment. Lessons from 2024 point to key priorities for the year ahead.

Key developments in 2024

2024 highlighted the importance of a directors' duty to consider or act in the interests of creditors where a company is insolvent or bordering on insolvency. The claim brought by the liquidators of BHS Group against certain former directors, following the group's collapse into insolvency in 2016, marked a watershed moment. It was the first time a court held company directors guilty of "misfeasant trading."

In this case, the directors were found to have failed in their duty to consider creditors' interests when entering into an onerous and expensive secured loan. The loan, which exhausted the group’s assets when it could not be repaid, directly contributed to the company's insolvency. By prioritising short-term solutions over long-term viability, the directors acted in breach of their statutory duties.

This landmark ruling underscores the heightened scrutiny on directors' decision-making during financial distress. Wrongful trading cases, which have traditionally been difficult to bring successfully, may now see renewed interest from insolvency practitioners. With the growing involvement of litigation funders willing to finance such claims, the ruling sets a precedent for greater accountability for directors.

The role of D&O insurance

The decision has significant implications for D&O insurance. The court’s finding that directors' personal liability cannot necessarily be capped by the level of their insurance cover is a critical development. Directors are now exposed to greater financial risks, even where their D&O policies are in place.

This heightened exposure is likely to lead to an uptick in demand for D&O insurance products that provide robust protection in insolvency scenarios. Insurers, in turn, may revisit their underwriting criteria and premium structures to account for this increased risk. For directors, this ruling highlights the importance of proactively engaging with their insurers and brokers to ensure sufficient coverage.

Practical steps for directors

In light of this decision, directors should take immediate steps to mitigate potential liability. This includes:

• Monitoring financial health: Directors must have a clear understanding of the company’s financial position, particularly during periods of distress.
• Engaging advisors effectively: It is essential to provide advisors with all relevant information and to carefully evaluate their professional advice.
• Documenting decisions: Maintaining clear and detailed records of decision-making processes can demonstrate that directors have acted with care, skill, and diligence.

The emphasis on creditor interests during insolvency is now more pronounced than ever. Directors who fail to take these steps may find themselves personally liable for significant sums, as seen in the BHS case.

What to look out for in 2025

The regulatory landscape for directors and officers is set to evolve further in 2025. One of the most pressing areas of focus is the Financial Conduct Authority's (FCA) increased attention to non-financial misconduct.

The FCA survey results

In October 2024, the FCA published the results of its survey of over 1,000 investment banks, brokers, and wholesale insurance firms. The survey revealed a concerning rise in reported allegations of non-financial misconduct between 2021 and 2023. Bullying, harassment, and discrimination were among the most common complaints.

Notably, the survey also highlighted how broadly "non-financial misconduct" can be interpreted. A significant number of incidents fell into the "other" category, including inappropriate or offensive language, alcohol misuse in the workplace, and retaliatory behaviour following allegations.

The FCA findings make it clear that fostering a healthy workplace culture is not just a matter of good governance, it is a regulatory imperative. Firms that fail to address non-financial misconduct risk not only reputational damage but also regulatory action and increased scrutiny of their directors and senior managers.

Non-financial misconduct and D&O liability

Directors and officers bear ultimate responsibility for setting and maintaining workplace culture. As such, they are likely to face increased investigations and claims if their organizations fall short in addressing non-financial misconduct.

To mitigate these risks, directors must prioritise:

• Clear policies and procedures: Firms should implement comprehensive policies to address misconduct and ensure they are regularly reviewed and updated.
• Training and awareness: Educating employees and senior managers on acceptable behaviours and reporting mechanisms can help prevent issues before they escalate.
• Transparent reporting channels: Establishing effective whistleblowing procedures can encourage employees to report concerns without fear of retaliation.

The absence of these safeguards may lead to wider questions about an organisation’s culture and governance, exposing directors to personal liability.

Upcoming FCA rules

The FCA is expected to publish its "final rules" on non-financial misconduct and these rules will likely incorporate non-financial misconduct into key regulatory frameworks, including the FCA Handbook, the Code of Conduct, and the Fitness and Propriety Test for employees and senior managers.

By formalising non-financial misconduct as a regulatory focus, the FCA aims to strengthen its enforcement powers and prevent harm to consumers and market integrity. For directors, this means 2025 will bring heightened expectations around workplace culture and accountability.

Key takeaways for directors and insurers

As we move into 2025, directors and officers must remain vigilant in addressing both financial and non-financial risks. The developments of 2024 have underscored the importance of:

1. Prioritising creditor interests during insolvency: Directors must act with care, skill, and diligence to avoid personal liability.
2. Fostering healthy workplace cultures: The FCA’s focus on non-financial misconduct highlights the need for robust policies and transparent reporting mechanisms.
3. Reassessing D&O insurance coverage: Directors should engage with insurers and their brokers to ensure their policies provide adequate protection against evolving risks.

For D&O insurers, these developments present both challenges and opportunities. While increased liability risks may lead to higher claims, they also underscore the value of comprehensive insurance products that address the full spectrum of directors’ responsibilities.

The evolving regulatory and legal landscape demands proactive action from all stakeholders. Directors, insurers, and regulators alike must work together to navigate these challenges and ensure that businesses remain resilient in the face of growing risks.

This article was originally published in Insurance Day.