View from the Top: Current D&O Risk and Regulation Trends

View from the Top: Current D&O Risk and Regulation Trends

View from the Top: Current D&O Risk and Regulation Trends This is Part II of our feature on D&O Liability Insurance

Regulatory risks
Regulatory risks are also high on any list of management concerns. Australia has very active regulatory bodies with extreme investigative powers in which D&Os have no right to silence and no right against self-incrimination. It is therefore imperative that examinees have their own independent legal representation and are fully prepared for such examinations. This can create significant cost exposures for the firm/ individual, and logistical problems if multiple people are examined, particularly if located in different countries, which has occurred in a number of bribery investigations Wotton + Kearney is involved with.

We are seeing an increasing prevalence of investigations within the fi nance industry, particularly by ASIC, and these are now extended to the corporate culture of an organisation. Culture is the realm of D&Os and will encapsulate the company’s recruitment, training, HR, remuneration, compliance and enforcement policies. Corporate culture is now also a trigger for liability under the new bribery accounting legislation, and there must also be the potential for it to be utilised in other industries.

Bribery and corruption are also now at the forefront of the regulator’s investigations. ICAC is extremely active on domestic corruption and ASIC and the DPP are eager to show that Australia has zero tolerance for bribery.
Australian law is currently confined to the bribery of foreign officials; however, recent strengthening of bribery laws now make deliberately or recklessly falsify accounting records an offence, which avoids the difficulty of having to prove money actually changed hands. Further developments are proposed, including deferred prosecution agreements where US-style plea bargains would be accepted, which encourage companies to self-report bribery issues and make prosecutions easier. Australian law still lags behind the US and UK bribery legislation; however, D&Os may still find themselves subject to such jurisdictions if they do business in the UK or if there is some ‘minimum contact’ with the US.

Looking ahead
Given the increasing exposures, it will not be sufficient for D&Os to establish appropriate procedures without showing constant assessment, enforcement and updating.

Bad debt provisioning is on the rise and Australia has one of the most stringent insolvent trading regimes in the world, in which the mere suspicion of insolvency can create liability. Interestingly, the government has mooted insolvency protection like the US ‘Chapter 11’. Each and every corporate collapse is now reviewed by a litany of corporate failure professionals and litigation funders to determine whether any claim against D&Os can be made. Section 596 of the Corporations Act (Cth) 2001 examinations of D&Os now appear to be a norm rather than the previous exception. It is therefore vital for D&Os to be prepared for examinations and that they have appropriate insurance cover to pay for such costs, in the absence of any company indemnity by reason of the company’s collapse. D&O insurers should be aware that an insolvency exclusion is not sufficient to exclude liabilities arising from a corporate collapse.

One issue that is still to be determined with certainty is the risk that insurance funds could be frozen by reason of a statutory charge.1 It is therefore encouraging to see the NSW attorney general reviewing the abolition of the statutory charge. Until that occurs, D&Os should ensure cover is available to them if a statutory charge occurs.