Biggart Baillie Solicitors

Directors’ Duties – Take Cover!

Tuesday, May 06, 2008

by Derek Ellery

The new Companies Act 2006 sets out details of Directors’ duties to their company for the first time.  These duties apply to all Directors and there are two in particular that pose an increased risk of claims against a Director as an individual:

• the duty to exercise reasonable skill and care; and
• the duty to promote the success of the company.

The new Act provides that members of the company can take action against a Director personally for an actual or proposed action or omission which involves breach of these duties, whether or not the Director benefits personally from that breach. 

Safeguards have however been included in the legislation to protect Directors from malicious lawsuits.  Before an action can proceed, a member has to satisfy the Courts that he has a good case and is not just a vexatious litigant but at this stage it is not clear how effectively the Courts will police shareholder activists such as environmentalists and trade unions.

Given the increased risk of claims against Directors it is important that Directors and Officers’ Liability Insurance is reviewed to make sure that policies cover in the new extended circumstances in which claims might be brought.

Key areas for review in policies will include:-

• ensuring that outgoing Directors, de facto Directors and shadow Directors are covered;
• ensuring that claims by the company against a Director for breach of duty are covered;
• ensuring that cover is provided for defence costs incurred in legal actions worldwide;
• ensuring that related costs such as medical expenses, travel and accommodation costs of any Director and his family are covered in relation to any overseas actions;
• ensuring that the claims definition covers regulatory and administrative investigations in any jurisdiction; and
• ensuring that the definition of loss covers liability for all costs, damages, expenses and judgments no matter in which jurisdiction the liability arises in.

The directors may wish to ensure that they have a direct indemnity agreement in place with their Company to ensure that all their legal costs are paid by the Company as and when they are incurred.  Such agreements can now legally be entered into however they do require to be disclosed in the Company’s accounts.

If you have any queries in relation to the above, please contact Derek Ellery at dellery@biggartbaillie.co.uk.