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Directors

Companies Act 1985, s.741 states that director includes any person occupying the position of director by whatever name called’. A director is therefore anyone who ‘directs’ (identified by function rather than title). De jure directors are formally appointed and registered. De facto directors (constructive) are never formally appointed but act openly. Shadow directors do not act openly, they ‘lurk in the dark behind those who do’, being persons ‘in accordance with whose directions and instructions the directors of the company are accustomed to act’ (s.741(2)). Both executive and non-executive (i.e. outsiders) have the same general legal duties. The Higgs Report (2003) on corporate governance has introduced the concept of independent director, i.e. a non-executive director determined by the board as being independent in character and judgement and there are no circumstances (e.g. former employee) which could affect, or appear to affect, the director’s judgement. The Code on Corporate Governance also calls for the appointment of a senior independent director to liaise between the board and major shareholders.

DIRECTORS AND OFFICERS LIABILITY INSURANCE (D&O)

Directors and officers liability is purchased by both for-profit and not-for-profit entities. It is designed to protect the personal assets of the firm’s directors and officers for negligent acts performed while employed by or serving on the corporate board. It is generally divided into the following parts:

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Insurance designed to protect Directors and officers from liability claims arising out of alleged errors in judgment, breaches of duty, and other wrongful acts related to their organizational activities.

Directors and Officers Liability Insurance for Liability Insurance

The Directors and Officers of companies may become liable to pay damages for wrongful acts such as failure of supervision of the affairs of the Company etc. Directors and Officers liability policy is therefore designed to provide protection to Directors and Officers of a Company against their personal liability for financial losses arising out of wrongful acts or omissions in their capacity as directors or officers. The coverage is granted in two parts under the insuring clause: (i) Company Reimbursement: Insurance of the Organization itself – Organization is entitled (and often obliged) by way of its articles of association to indemnify its Directors and Officers. However, the extent of this indemnity is strictly limited under the Companies act. The organization may only reimburse to the extent of legal costs expended and then only if the Director/Officer successfully defends that action. (ii) Directors and Officers: (a) Insurance of the Director/Officer – if the action against him is successful, then the Director/Officer is “on his own”. He is exposed not only to legal costs but to any damages which might be awarded against him. The organization will now of course be precluded from indemnifying him.(b) The second part of the cover (D&O) will now respond, provided that the Director/Officer has not acted in a deliberately dishonest manner. Fines and other penalties are not recoverable. As in the case of other liability insurance policies, the D&O policy is subject to compulsory excess and certain exclusions. Besides, the policy provides for Directors and Officers to comply with certain specified claim conditions. Many coverage are provided under the policy as Add-on extensions.

Directors’ and officers’ liability insurance

Indemnifies directors and officers for loss arising from claims against them by reason of a wrongful act related to their duties. The indemnity is on annual aggregate limit basis inclusive of legal costs and expenses incurred in responding to any allegation against directors and officers. Defence costs related to certain criminal or regulatory charges are also covered. The policy does not cover fines, penalties or punitive damages or, unless extended, liability as pension trustees. The insurer indemnifies the company where it has reimbursed a director or officer in relation to an insured event. The policy is claimsmade, carries an excess and may be extended to cover employment practices liability. See ALLOCATION.

Directors’ duties/liabilities

A director has extensive powers to bind the company but may be personally liable for a breach of duty. The duties embrace: compliance with the Companies Acts and the Articles of Association; exercise of reasonable care and skill; and a fiduciary duty to act in good faith. Directors principally owe their duties to the company but may also owe duties to creditors and the company’s employees in general. Certain sections of the Companies Acts and other legislation (e.g. Health and Safety) expose the director to criminal liability. Directors may also attract personal liability for fraudulent trading or wrongful trading or exceeding their authority. See DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE.