In the role as manager of a company, a director is exposed to numerous claims for personal liability arising from potential wrongdoing. This can include liability for breach of their general duties under the Companies Act 2006 (CA 2006), liability to third parties for misrepresentation or to the company’s employees for discrimination etc.
In this article, we examine the ways in which directors may be relieved from, or protected against, personal liabilities incurred in undertaking their role.
General Prohibition against Exemption / Indemnification
Under the CA 2006, any provision that purports to exempt or indemnify a director from any liability in connection with any negligence, default, breach of duty or breach of trust in relation to the Company is void. It therefore follows that a company may not exempt a director from liability for breach of one or more of their duties to the company.
Nevertheless, there are a number of ways a director may be relieved from liability outside of the general prohibition. This includes taking out directors’ and officers’ insurance, ratification by the company, release by agreement and relief granted by a court.
We shall look closer at the “reliefs” available to directors in respect of their personal liability below;
1 – Directors’ and Officers’ Insurance (D & O Insurance)
D & O Insurance is designed to protect directors and officers of a company from loss resulting from claims made against them in relation to the discharge of their duties as directors or officers respectively.
D & O Insurance is not compulsory, but the CA 2006 permits a company to purchase insurance for its directors against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to the company of which they are a director.
2 – Qualifying Indemnity Provisions
The general prohibition on a company exempting or indemnifying a director from liability for breach of one of his duties is subject to relaxation which allows a company to provide an indemnity to a director arising from proceedings brought by third parties (qualifying third party indemnity provision).
This includes indemnification against any liability incurred in the defence of civil proceedings brought by a regulator even if a judgement is given against the director, provided that this does not include any regulatory penalties.
The Company may also provide a qualifying pension scheme indemnity provision that will indemnify a director of a company acting as a trustee of an occupational pension scheme against liability incurred in connection with the company’s activities as trustees of the scheme. This indemnity is permitted provided it does not cover any liability for fines imposed in criminal proceedings, penalties payable to regulatory authorities or any liability incurred unsuccessfully defending criminal proceedings.
3 – Articles and Indemnity Agreements
Many companies have indemnity provisions in favour of the company’s directors in their articles of association.
Directors may not be happy to rely on these types of provision as there is general uncertainty about the director’s ability to enforce such provisions. A director may therefore prefer indemnity provisions expressly included in an agreement between him or her and the Company, for example, in a service contract, letter of appointment or a standalone deed of indemnity.
4 – Ratification
The CA 2006 does allow a company to ratify (in other words condone or forgive) conduct of a director in respect of negligence, default, breach of duty or breach of trust in relation to the Company.
Any decision by a company to ratify a director’s conduct amounting to negligence etc. must be taken by the members without reliance on the votes in favour by the director or any connected person (i.e family member).
Ratification would require an ordinary resolution of the members of the company unless the articles of association require a higher majority or unanimity.
5 – Release by Agreement
In general, there is nothing affecting the power of the directors to decide not to sue an offending director, or to settle or release a claim made by them on behalf of a company.
Therefore, a director could be released from liability for a particular breach by an appropriately worded agreement with the company.
However, any decision not to sue and any agreements to settle or release a claim must be made in accordance with the directors’ general duties owed to the company.
6 – Power of Court to grant Relief
CA 2006 provides that in proceedings for negligence, default, breach of duty or breach of trust against a director, the court may relieve them from liabilities if it appears to the court that the director has (a) acted honestly, (b) they have acted reasonably and, (c) having regard to all of the circumstances of the case, they ought fairly to be excused.
However, in these circumstances, the onus is on the director to persuade the court that he has acted honestly and reasonably. It is only when those conditions are fulfilled that the court will consider whether the director should be excused from any potential liability.
In recent years, the business world has experienced widespread changes and we have seen significant corporate wrongdoing on a considerable scale. This has made the role of being a company director a difficult task which brings with it increasing risk.
It is therefore important that an individual undertaking the role of company director understands the duties he or she owes to the company, the risks to them personally should they breach these duties, and also the protections that are available to them should they face personal liability in the execution of their role
If you wish to discuss this topic or if we can assist you with any other corporate related issues, please contact Paul Evans on 029 20 345511 or email@example.com