ML Covered - May 2025

We are pleased to share our latest instalment of ML Covered, our monthly round-up of key events relevant to those dealing with Management Liability Policies covering D&O, EPL and PTL-type risks.

Insolvency Service publishes guidance on director disqualification sanctions

The Insolvency Service has published new guidance in respect of (i) director disqualification sanctions under section 3A of the Sanctions and Anti-Money Laundering Act 2018 and (ii) the licence application process for directors who are subject to director disqualifications.

The Insolvency Service's role

The Insolvency Service's role includes investigating and prosecuting individuals who are suspected of breaching director disqualification sanctions and licensing offences. Breaches of the sanctions carry penalties of up to two years imprisonment. The Insolvency Service can also refer cases to other law enforcement agencies for prosecution. As such, with a high number of insolvencies expected this year, it appears that enforcement action against D&Os remains a continued focus.

Guidance

With this in mind, the Insolvency Service has now issued new guidance, setting out what the director disqualification sanctions mean and how individuals can apply for a licence.

The guidance details that unless a licence has been issued or there is an exception in place, director disqualification sanctions will have the effect of banning individuals in England, Wales, Scotland and Northern Ireland from directly or indirectly:

• being a director of a UK company;

• being a director of a foreign company that has a sufficient connection to the UK, even if it is not registered here. For example, if it carries out business or has assets here; and

• taking part in or being concerned in the promotion, formation or management of a company.

The Insolvency Service has also published guidance on the licence application for directors who are subject to director disqualifications. The guidance explains that unless there is an exception under legislation, you need to have applied and been issued with a licence by the Insolvency Service before carrying out any of the prohibited activities. Any individual, a company or organisation currently barred from being a director, promoting, forming or managing a company due to a director disqualification sanction are eligible to apply for a licence.

The Insolvency Service will only issue a licence for a defined period to carry out specific acts, and it may also contain conditions that need to be met. Applications for a licence must include:

• exact details of why the individual needs a licence (including what duties they need it for);

• how long the individual will need the licence for; and

• evidence showing that only the individual can carry out the prohibited acts under a licence and not another officer, employee or agent of the company.

Further information may be required by the Insolvency Service. It is the responsibility of the applicant to ensure that what they are authorised to do under the licence does not conflict with any other sanctions. A separate licence application must be submitted for each individual company.

A licence application will be acknowledged by the Insolvency Service within 5 working days. The initial review should be complete within four weeks of receiving all information. However, it may take several weeks to months to reach a final decision, depending on the facts of each case. Rejected applications can be appealed.

Key Takeaways

The number of enforcement actions taken by the Insolvency Service remains high. With the number of companies becoming insolvent reaching a 30-year high in 2023, and with a high number of insolvencies expected for this year, it can be expected that the Insolvency Service will be investigating the conduct of a larger number of directors, potentially resulting in larger number of disqualifications. Directors should be mindful of the implications of director disqualification sanctions under section 3A of the Sanctions and Anti-Money Laundering Act 2018.

To read the Insolvency Service's new guidance, please click here and here.

Supreme Court upholds that fiduciaries must act with "single-minded loyalty toward their principals (or beneficiaries)"

In Rukhadze and others v Recovery Partners GP Ltd and another [2025] UKSC 10, the Supreme Court unanimously affirmed the legal test for the account of profits rule (the Profit Rule).

The Profit Rule

To summarise, the Profit Rule requires fiduciaries to account for a profit that they make out of their position as a fiduciary, unless they have fully informed consent from the principal to keep the profit.

Background

Following the death of Georgian businessman, Arkadi Patarkatsishvili (Badri), his family instructed an asset recovery company in the British Virgin Islands and an LLP (together the Respondents) to recover Badri's assets. The appellants were former company directors of the Respondents (the Appellants) and were held to be fiduciaries (and note that fiduciaries can include trustees, partners and some professional advisers). The Respondents alleged that the Appellants resigned from their fiduciary positions with the intention of taking advantage of this business opportunity, which they had been working on for the Respondents, for their own personal gains. In doing so, the Respondents alleged that the Appellants had breached their fiduciary duties and had unlawfully profited from the lucrative contract.

The High Court ruled in favour of the Respondents and the Court of Appeal upheld the ruling. Throughout the proceedings, the Appellants had reserved their right to seek to depart from fiduciary principles before the Supreme Court, namely for the Profit Rule to be changed so that the test of causation is applied on the "but for" basis, by asking whether a fiduciary would have made the same profits if they had avoided any breach of fiduciary duty.

Decision

The Supreme Court unanimously dismissed the appeal. Lord Briggs gave the leading judgment. Lord Briggs stated that "the rigour of the profit rule, together with the conflict rule to which it is closely related, continues to underpin adherence by fiduciaries to their undertaking of single-minded loyalty to their principals and beneficiaries". Lord Briggs concluded that the grounds for appeal did not carry significant weight and did not add up to anything significant in the aggregate to justify a departure from precedent. Lord Briggs added that the principle is intentionally strict. He therefore concluded that the law regarding a fiduciary's duty to account for profits, or the means by which equity identifies profits that are subject to that duty, should neither be reformed nor changed.

Takeaways

Fiduciaries, whether directors or trustees, should note this decision as a clear reminder that the Profit Rule will be applied to anyone who deviates from their "single-minded loyalty" owed to their principals.

The Appellants in this case had sought to argue that the Profit Rule (which had been explored in some eighteenth century case law decisions) needed updating to account for the modern world of commerce where the fiduciary and the principal are both sophisticated operators, having access to the same information, who may also rely on less formality, and far less on trust, than in the traditional relationships. However, interestingly the Court noted that the introduction of the Companies Act in 2006 (which codified directors' fiduciary duties) showed that the UK Government considered that the Profit Rule was still relevant in more modern times.

To read RPC's blog, please click here.

Neonatal care leave

In this month's ML Covered, we bring to your attention that, on 6 April 2025, the long-awaited new statutory right to neonatal care leave came into effect in the UK. The new right provides employees with up to 12 weeks' leave if their babies spend an extended period in neonatal care.

Background

Neonatal care leave has been a topic of legislative conversation since the UK Government's Spring 2020 Budget, when it was announced that the Government would create a new statutory entitlement to neonatal care leave and pay. In April this year, the new right came into effect under the Neonatal Care (Leave and Pay) Act 2023.

The right applies to eligible parents of babies born on or after 6 April 2025. The entitlement does not apply retrospectively, therefore employees with babies born before this date, are not entitled to the leave or pay.

Features of neonatal care

Neonatal care refers to medical care which a baby receives within the first 28 days after birth. Neonatal care includes care received in a hospital, care given to a baby after leaving the hospital under the direction of a consultant, ongoing monitoring arranged by the hospital and palliative or end-of-life care.

The entitlement to neonatal leave ends 68 weeks after the baby's date of birth.

In the case of multiple births, such as twins and triplets, there is only a single entitlement meaning if an employee had twins, there wouldn’t be "double" the entitlement to the leave.

Who can take the leave?

For the right to leave to apply, the employee must be taking leave to care for the child, and must be either:

• the child's parent;

• the intended parent where there is a surrogacy arrangement;

• the child's adopter, prospective adopter; or

• the partner of either the adopter or prospective adopter.

When can the leave be taken?

For the right to arise, the baby must receive seven days uninterrupted neonatal care, which constitutes "a qualifying period". For each qualifying period, the parent receives one week of leave, subject to a maximum of 12 weeks. It is worth noting however that because there must be a qualifying period of seven days, the right to take leave only arises after the baby has been in neonatal care for seven days (day 8). As a result, parents are required to use other forms of leave, usually maternity or paternity, to cover the first seven days that the baby receives neonatal care.

There are different rules depending on when the employee takes leave. The legislation divides neonatal care leave into two tiers. The tier 1 period starts when the employee's baby starts receiving neonatal care and ends on the seventh day, after the baby stops receiving care. During tier 1, eligible employees can take one week's neonatal care leave for each week that their baby receives uninterrupted neonatal care, up to a maximum of 12 weeks. This leave can be taken in non-continuous blocks; however, each block must be a minimum of one week.

Tier 2 is any other period after tier 1 has ended during which the employee is entitled to take the neonatal care leave. Tier 2 must be taken in continuous blocks.

Examples:

An eligible parent's baby receives neonatal care for four weeks. The parent is therefore entitled to four weeks of leave (after the baby has been in care for seven consecutive days). If the parent takes four weeks of leave while the child is receiving care, this is tier 1 leave. If the parent chooses to take one week of leave while the child is receiving care this, again, would be tier 1 leave. However, they could take a second block of the remaining leave (three weeks) at a later date (within the first 68 weeks after birth) as tier 2 leave. 

Notice requirements

The notice requirements depend on the type of leave the employee intends to take. For tier 1 leave, an employee must notify their employer before they are due to start work on the first day of leave. The notice does not need to be in writing.

For tier 2 leave, the employee must notify their employer in writing, at least 15 days before the date they intend to take the leave. If the employee intends to take 2 weeks or more of leave, the employee must tell the employer 28 days before the leave starts.

Employers may, however, vary the specific notice requirements at their discretion.

Pay

While the right to neonatal care leave applies from the first day of employment, to be eligible for neonatal care pay, the employee must have 26 weeks of continuous service, and they must have earned at least £125 a week on average for 8 weeks before taking the leave.

The pay will be the lower of £187.18 per week or 90% of the employee's average weekly earnings.

What does this mean for employers?

As with all new statutory changes, the effect on employers is yet to be fully seen. However, we consider the following points to be worth noting:

• Familiarisation – employers will need to familiarise themselves with the new rules and consider implementing their own neonatal policy or amending existing policies.

• Interaction with other leave – neonatal leave does not replace existing leave. It can be taken in addition to any maternity/ paternity or other types of leave which an employee is entitled to. However, two different types of leave cannot be taken concurrently.

• Discretion – employers can choose to vary the existing requirements (notice, leave allowance and pay).

As ever, when the law changes there will be those employers that are not up-to-date, and the possibility of claims being brought if rights are not upheld. Brokers and insurers would be advised to bring this change to the attention of insured companies to ensure they don’t fall foul of the changes.

For further information on this and updates, see our Work Couch podcast here and sign up to our podcast in that link.

TPR expands oversight of professional trustee firms

The Pensions Regulator (TPR) has announced an extension to its oversight of professional trustee firms as part of the regulator's shift towards a more prudential regulatory approach.

On 2 April 2025, TPR’s chief executive, Nausicaa Delfas, delivered a speech confirming that this move follows extensive research into the operations of 11 major trustee firms. TPR's research examined their business models, the risks and opportunities they face, and potential conflicts of interest. The findings revealed a diverse range of business models and a substantial increase in the number of professional trustees, which Delfas said brings both risks and opportunities for pension savers. In response, TPR has confirmed it intends to formally extend its supervisory efforts to ensure better outcomes for savers and build on its existing relationships with the largest pension administrators.

TPR has now published its market oversight report which identifies potential risks to member outcomes, examining issues related to employer relationships, profit models, sole trusteeship, and in-house advisers. The regulator aims to begin supervisory relationships with professional trustee firms this summer, with plans to extend this oversight to all firms by the end of the year. TPR is also seeking feedback from the industry and inviting stakeholders to share relevant insights.

The adoption of supervisory oversight of professional trustees will be something PTL insurers should consider alongside their wordings and consider whether they should expressly carve out regulatory costs for any professional trustee sat on a trustee board.

To read TPR's market oversight report, click here.

TPR finds trustees failing to assess climate risk