Trade credit insurers are expected to pay some £31 million to help firms in the supply chain recover from the collapse of UK construction company Carillion, according to the Association of British Insurers (ABI).
And the collapse could also trigger legal action with potential claims for negligence and wrongful trading faced by Carillion’s directors from the liquidators, according to some legal experts.
Trade credit insurance covers firms against the risk of not being paid for goods or services that they provide, following an insolvency, protracted default or political upheaval. Claims in this sector have spiralled in recent months thanks to a number of high profile company collapses including Monarch, Palmer & Harvey, Multiyork and Misco. In 2016, trade credit insurers paid out £210 million to businesses due to non-payment.
Mark Shepherd, assistant director, head of property, commercial and specialist lines, at the Association of British Insurers, said the demise of Carillion acts as a powerful reminder of how trade credit insurance can be a lifeline for businesses in uncertain trading times.
“For all businesses, large or small, bad debt could easily put their day-to-day operations at risk, threatening the jobs of their employees. One insolvency can risk a domino effect to hundreds of firms in the supply chain. Trade credit insurance is an essential resource that provides businesses with the confidence to trade, secure in the knowledge they are financially protected when insolvencies occur,” Shepherd said.
In terms of potential claims for negligence and wrongful trading, George Hilton, Insolvency and Insurance barrister at chambers 2 Temple Gardens, said that the spotlight will turn to the actions of Carillion’s directors in the run up to the liquidation.
“There have been rumours that Carillion’s liquidators may explore potential claims against its former directors. If Carillion’s directors knew, or ought to have concluded that there was no reasonable prospect that Carillion would avoid going into liquidation before it became insolvent, the directors may be held liable,” Hilton said.
“Any compensation ordered would go towards potential payments the liquidators would ultimately make to Carillion’s numerous creditors.
“Liquidators may also contemplate causes of action against Carillion’s directors on the basis that they failed to exercise reasonable skill, care and diligence in their actions. It is, however, too early to tell whether the evidence will support either type of claim against Carillion’s former directors.
“The evidence gathering process will undoubtedly take a long time given the scale of Carillion’s affairs. The current political climate and public uproar at excessive executive pay may add to pressure on the liquidators to commence their investigations as quickly as possible.
“The liquidators will want to scrutinise Carillion’s former directors’ actions forensically. There may be more sleepless nights ahead for some of Carillion’s directors – or their insurers.”
Trade credit insurance, ABI, Carillion, UK, Insurance, Mark Shepherd
This article was originally published in Intelligent Insurer and can be accessed here.