Directors’ and officers’ insurance protects them from these issues. Frequently, the mistake they make will not be uncovered for some time. Then, armed with the wisdom of hindsight, a zealous shareholder, group of institutional shareholders, liquidator or other interested person may use that mistake as a hook on which to hang a legal action against the individual director or officer.
No longer can directors rely for protection on the separate legal personality of their company with the result that ‘piercing the corporate veil’ has become an increasingly common occurrence. ‘Limited liability’ protects only the shareholders and not the director, whose personal liability is real and unlimited. Legislation, as well as judicial opinion, confirms that not only are onerous responsibilities and duties imposed by law on directors but also that there is a significant risk of personal liability attaching to them. All directors should now be reassessing the full extent of their duties in law and their exposure to personal liability.
The number of occasions when actions could be called into question, and subsequently regarded as wrongful, is far greater than one might at first imagine. They include: negligent advice or miss-statement (particularly in the context of a merger or takeover, when, for example, a failure to understand economic trends results in a poor forecast of the company’s performance), any act which goes beyond the limits of the company’s constitution (such as excessive borrowing), unauthorised payments (however innocently made), failure to disclose the full extent of the director’s interests, failure to comply with a myriad of stringent statutory requirements.
Exposure to personal liability may also arise from a director’s unavoidable conflict of interests, the making of loans, imprudent investment, the negligent supervision of delegated responsibility, or simply plain error of judgment, particularly in allowing the company to carry on trading at a time when, with hindsight, it should have ceased.
Clearly, all directors need to exercise due diligence in avoiding, as far as they can, such personal liability. However, they will never be able to eliminate risk of loss totally. Their safety net should be the protection afforded by directors’ and officers’ insurance (D&O).
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