Australia is witnessing a significant rise in business insolvencies, (opens a new window) which has important ramifications for directors and officers (D&O) and the financial lines insurance sector.
This increase highlights the vulnerabilities present in the corporate landscape and emphasises the urgent need for robust D&O insurance policies to help safeguard business leaders against potential liabilities.
Rising insolvency rates in Australia
Recent data from the Australian Securities and Investments Commission (ASIC) indicates a sharp uptick in company insolvencies.
From 2023 to 2024, 7,742 businesses entered external administration, marking a 36.2% increase compared to the previous year.
Sectors such as construction, accommodation and hospitality have been particularly hard hit, accounting for a substantial portion of these insolvencies.
Several factors have contributed to the increase in insolvencies, including high operating costs, elevated interest rates, and intensified debt recovery efforts by the Australian Taxation Office (ATO).
The ATO's increased enforcement of tax debts has placed additional financial pressure on businesses and smaller enterprises, leading to increased insolvencies.
Legal and financial risks for Directors and Officers
When a company becomes insolvent, directors and officers can face various legal and financial risks, often becoming the primary targets of ASIC investigations and litigation.
In addition to regulatory action, creditors, liquidators, and shareholders may pursue claims alleging mismanagement, breach of fiduciary duties, or trading while insolvent.
Such investigations and claims can lead to significant liability for legal costs, civil penalties and damages.
S. 588G Corporations Act 2001 (opens a new window) deals with a director’s duty to prevent insolvent trading.
A civil penalty provision applies to a director who fails to prevent a debt being incurred where they are aware that there are grounds for suspecting insolvency, or where a reasonable person in a similar position would suspect insolvency.
Additionally, insolvency often triggers scrutiny over past decisions, including financial reporting, debt structuring, and market disclosure, making directors vulnerable to broader claims of breaches of continuous disclosure obligations and the duty to act with reasonable care and diligence and in the best interests of the company.
Litigation brought by liquidators and shareholder class actions represent key risks.
Without adequate D&O insurance, executives may face costly legal defences, civil penalties, settlements, or damages.
As insolvencies rise, so does the likelihood of claims, reinforcing the need for proactive risk management and robust Directors & Officers policy coverage.
Implications for D&O Insurance
Insolvency-related claims have become a trending topic of discussion when it comes to understanding your D&O policy.
In response, insurers are increasingly incorporating insolvency exclusions in D&O policies.
These exclusions seek to explicitly deny coverage for claims arising from a company's insolvency, potentially leaving directors and officers personally exposed to financial liabilities.
However, the wording of such exclusions and their potential application to a particular claim and particular allegations needs to be carefully assessed.
Understanding such exclusions is crucial, as they can significantly impact the protection D&O policies can provide to boards.
Navigating the complex landscape with Lockton's Financial Lines Claim Advocates
In this challenging environment, businesses need expert guidance to navigate the complexities of financial lines claims.
Our Professional & Executive Risks claim advocacy service offers expertise in assessing and managing D&O claims.
Our proactive approach includes guidance on ensuring adequate notifications of potential claims under the policy and hands on assessment and management of a claim.
To understand more about how your D&O policy responds to a claim, contact our Professional & Executive risks claims specialists.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. The contents of this publication are not intended as a legal commentary or advice and should not be relied on in that way. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action based on the content in this publication. © 2025 Lockton Companies Australia Pty Ltd.
