Directors' Liability, Indemnities and Insurance
With increasing regulation, directors and officers face even greater exposure to potential personal liability for claims made against them in their capacity as directors and officers of the companies they serve.
At the same time, shareholders and other stakeholders are playing a more active role in the governance of companies. With this comes the need for greater awareness of the duties and responsibilities of directors and rights that one may have in relation to holding directors accountable in a case of wrongdoing. Given the growing burden of directors' responsibilities, potential liabilities, and increasing litigation, directors will be keen to have the comfort of indemnities and insurance as permissible forms of protection.
The Companies Act of Jamaica
The Companies Act permits a company to indemnify a director or officer against personal liability, but it does not require the company to do so.
A company's Articles of Incorporation (Articles) may include a power for the company to grant indemnities to directors to the extent permitted by the Companies Act. For example, Article 142 of Table A provides that every director, managing director, agent, auditor, secretary and other officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings, whether civil or criminal, in which judgement is given in his favour or in which he is acquitted or in connection with any application under Section 389 of the Act in which relief is granted to him by the Court.
The Companies Act defines "Officer" in relation to body corporate to include a director, manager or secretary of that body corporate. So, a manager and the company secretary are similarly entitled to an indemnity.
Separate Deed of Indemnity
Even if a provision in the Articles obliges the company to indemnify a director, the director will not be able to enforce that provision directly against the company, as the Articles are deemed to be a binding commitment between a company and its members (with the director not being a party to this arrangement in his capacity as a director).
A director may only be entitled to rely on, and enforce, an indemnity contained in the company's Articles if the director can show that the indemnity is an express or implied term of the contract between the director and the company. Therefore, the director's letter of appointment or service agreement should state that the director is entitled to be indemnified in accordance with that indemnity contained in the company's Articles. Inclusion of the indemnity in the director's letter of appointment or service agreement also allows for the scope of the indemnity (including the limitations and exclusions), the procedures for making claims under the indemnity and the conduct of proceedings brought against the director to be clearly outlined. The use of a separate deed avoids the uncertainty of enforcement and provides the director with protection that the company cannot unilaterally change the director's right to the indemnity or its terms.
When entering into a separate deed of indemnity, a company should consider whether it is acting in the best interests of the company in giving directors' indemnities. Generally, such indemnities will be justified on the basis that companies will wish to attract talented directors who will be concerned with their ability to freely carry out their lawful duties without risk in the indemnified circumstances and who may not be prepared to act as a director without this protection.
Although directors' indemnities usually provide that directors are indemnified to the "fullest extent permitted by law" companies and their directors must be aware that there may be cases where the indemnities should be limited or qualified.
A deed of indemnity will be of little value if the company that has agreed to provide the indemnity has become insolvent or is otherwise unable to pay. Insurance cover is therefore useful, and the provision of such cover is also considered best practice.
The Companies Act specifically allows companies to maintain directors and officers (D&O) insurance, which will give directors comfort that they will not be required to fund, from their own personal resources, possibly protracted and expensive litigation arising from the holding of the office of director. While the scope of cover of these types of policies may overlap with the indemnity provisions in the Act, D&O insurance can be more generous than indemnities a company can provide under the Act. So for example, it may be possible to get D&O cover for the costs of defending criminal proceedings up until the point that a director is found guilty (if he is).
The wording and conditions of D&O insurance policies do vary, and the company should ensure that the cover is appropriate and as broad as possible. The level of cover will, depend on a number of considerations such as:
• The industry in which the company operates;
• The degree and complexity of regulatory oversight of that industry;
• Whether the company is publicly listed;
• What liabilities the policy should cover and any exclusions or limits of such cover? For example, what costs it will cover, are there any limits per claim and whether there should be separate limits for different classes of directors;
• Whether the cover will automatically extend to directors of any subsidiaries acquired after the policy comes into effect; and
• Whether the policy covers both past and present directors.
The company and the directors must have a clear understanding of what is covered and what is not and each insurance policy should be carefully read to ensure it covers the desired risks, to the desired extent. The company secretary should include a review of the terms of any deed of indemnity and D&O insurance and be in a position to advise the board of directors of any changes. Directors, on their part, should seek annual confirmation that any agreed D&O cover is in place and confirmation of whether any changes have been to its terms.
Gina Phillipps Black is a Partner in Myers, Fletcher & Gordon's Commercial Department. She may be contacted via email@example.com or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.