News & Events

Directors' and Officers' Liabilities

Since 1963 directors have been subject to a number of statutory duties which, in 1990, were further added to by the introduction of the concept of reckless trading. The passing of new legislation and decisions of the courts means the duties and potential exposure of directors has increased. This increase in responsibility necessitates the need for indemnity and/or insurance as directors face the threat of personal liability in relation to claims arising from their actions in the management of company affairs.

The key point to remember is that, while the liability of a company may be limited, a director’s personal liability is potentially unlimited. This unlimited liability extends to the company itself, the shareholders, employees, prospective investors, creditors and the government.

This article will focus on a few areas of potential danger for directors and officers.

Liability to the company and the shareholders

In recent years the courts have moved towards accepting that a director is obliged to use reasonable care, skill, and diligence appropriate to his level of expertise and the extent of his actual responsibility in discharging his duties.  The extent of the responsibility varies between directors and, in particular, between executive and non-executive directors.  It is important, therefore, that a director is clear about his duties, especially those not directly related to his position as director.  If a director breaches these standards, he could be held legally liable to the company.  Directors are responsible to the company and not to shareholders. 

Liability to third parties

A director may be personally negligent where he is personally responsible for a particular transaction or contract.  Normally, a plaintiff would have to know
that the director has a particular function in a company in order to issue proceedings against him, e.g., if the director has engineering expertise and was involved in the design of a machine that resulted in damage to the plaintiff.  In that case, the director who designed the product has acted in the course of his duties to the company and the company should therefore be vicariously liable for the director’s work.  However, the director also has separate responsibility.  This is an important point as, in the event of a company’s insurance cover being inadequate or if it doesn’t cover the specific loss, then the plaintiff could potentially pursue the director personally for damages. 

Accordingly, a director or officer should never assume that simply because they are acting for the company they are personally protected by limited liability.  Directors’ and officers’ insurance policies are available for these types of claims but limit the extent of cover in respect of third parties.  It is important then to ensure that a director/officer is covered under the company’s policy for those activities which are excluded activities under their own policy.

Liability in employment claims

Legal proceedings in the employment arena against directors and senior officers are on the increase and are now a major area of concern for companies. Of note is the rise in claims for sexual harassment and stress through bullying.  Employees are now not only suing the company but also individual directors, with resulting embarrassment for that director and increased publicity for the company.  In order to avoid such publicity many of these claims are settled. Depending on the company’s relationship with the particular director, the company may seek a contribution from the director towards the settlement.  Most policies now include protection in respect of employment practices.

Liabilities in connection with selling companies
 
In the “Celtic Tiger” climate that has existed in Ireland over the last ten years, liability in connection with the sale of companies has been particularly relevant. This type of liability is most likely to be associated with directors of public companies in relation to false or misleading information contained in offer documents.   In these circumstances, a director may have a responsibility to shareholders, potential investors and other third parties. For example, the director of a company circulating an offer document is obliged by the takeover rules to accept responsibility for the quality of the information in the document. He may also be liable in negligence to the shareholders of the target company, as may the directors of the target company, in respect of the recommendations by them to their shareholders in respect of the offer. There are civil and criminal consequences for directors (under the Companies Acts) if allegations of false and/or misleading information are proved. 

Liability under competition laws

The Competition Acts have created a civil liability for certain breaches of competition rules.  Individual directors or responsible officers can be prosecuted in their personal capacities if it is shown that they authorised or consented to the committing of the offence.  An individual can be fined on summary conviction or imprisoned for up to six months, but on indictment the court is empowered to impose a fine of up to €3.8m and a term of imprisonment not exceeding 2 years.

This is not an exhaustive list of potential danger areas for directors.

Directors and Officers’ liability insurance is now widely available in Ireland and covers existing directors, former directors and directors approved during the currency of the policy.  The policies cover a multitude of risks/costs such as:

• losses arising from claims brought against directors for wrongful acts committed in performance of their duties, for example, misleading statements, defence costs paid if the action proceeds;
• judgments or awards against directors;
• reimbursement to the company for providing an indemnity to directors; and
• investigation, legal fees and expenses involved in defending an official examination into the corporate affairs of a company for wrongdoing, which includes the wrongdoing of directors.

However, these policies have restrictions:

• they only pay out in respect of claims against directors and do not cover claims against companies;
• claims are on a "claims made basis" only. Therefore, if the policy lapses and a claim is made, the policy will not cover the claim; and
• they normally exclude personal injury actions, negligence in providing professional services, fines, and damages in relation to pollution claims.

In conclusion, it is in each director and senior officer’s best interests to ensure that they have adequate insurance to cover their activities as a director.  There are a number of providers of this type of insurance in Ireland and with increased competition those providers are offering more benefits under each policy.

ORLA KEANE AND Gráinne Macdougald
June 2003