THE LAW: Directors Need Extra Protection
Recent Western Cape Business News
One of the key aspects of the 2008 Companies Act, which will be coming into effect later this year, is that it clarifies directors’ common law fiduciary duties and responsibilities and introduces further statutory liability for these individuals in their personal capacities, it also simplifies the process of suing a company director in his personal capacity.
According to Jonjon Smit, sales director at CIB Insurance Solutions (CIB), this means it is crucial that company directors, who are now exposed to potential financial losses, take adequate steps to protect themselves. “Directors will no longer find protection behind the corporate veil, which puts them at an enormous risk of personal financial ruin in the event of even one mistake at some point in their careers.”
Smit says there are a number of stipulations in the Act that significantly increase the probability that company directors will be subject to litigation.
· Section 157, which brings class actions into mainstream corporate and commercial activity by extending the right to make an application to a court to various stakeholders either acting on their own behalf or on behalf of a group of affected persons.
· Section 165, which abolishes the common law derivative action and creates a new statutory derivative action which reduces the costs involved in such an action, therefore more aggressive shareholder activism seems likely once the new legislation becomes operative.
· Section 218, which extends the right to claim from a director for a contravention of The Act, to anyone who has suffered a loss due to the contravention.
Smit says it is crucial that directors, or the companies they work for, ensure they have the correct insurance cover in place to protect themselves in the event of such action being taken against them.
He says obtaining this cover has been made possible as a result of sections of The Act governing the purchase of indemnity insurance being widened to permit a company to purchase such cover for its directors, at its cost, even if the directors receive the proceeds of the policy. “The company may, however, not take out insurance to indemnify the directors for offences such as lack of authority, reckless, fraudulent or insolvent trading or defrauding a stakeholder, or wilful misconduct or breach of trust.”
In response to the introduction of the Act, some players in the local insurance industry have been actively developing products to address these new personal liability needs of directors and managers.
Smit says its SHA Platinum Flexi has been specifically designed in line with the Act.
For example, it offers cover to all persons who can incur personal liability under the New SA Companies Act by expanding the definition of Director to include: committee members whether employees or otherwise, employees in managerial positions, prescribed officers and company secretaries.
Other features include:
· Defence costs for allegations of criminal acts, willful breaches of trust, willful misconduct, reckless trading, and breaches of authority in accordance with the Act;
· Increased major shareholder protection;
· Subsidiaries as defined in the New Companies Act;
· Directors personal liability for Employment Related wrongful Acts including emotional distress for employment related matters;
· Failure to supervise carve-back on professional indemnity exclusion;
· Bodily injury exclusion limited to direct losses i.e. providing cover for indirect claims;
· Subsidiaries and insured's beyond our borders by providing worldwide jurisdiction and territorial limits excluding North America;
· Conditions include non-disclosure by proposer, no imputation of fraud to other directors and prejudice due to breach of policy conditions.
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