The economic and legal landscape of the country is ever changing in today’s world and so is the pressure, expectations and demands which are constantly mounting on directors of the companies in discharge of their duties. Directors are expected to be extremely professional and result orientated as they have to work towards fulfilling the expectations of all the stakeholders of the company. If organizations have to perform at their optimum and achieve set targets then the management has to be ready to take risks. It will not be able to take risk unless it’s assured that every care and caution is taken and allthe duties have been duly complied with so that the organization is convinced that the consequences of its actions do not and will not cripple any director.
We are quite aware that a director’s personal liability is unlimited placing all his personal assets at risk. Unlike the Company, he cannot take shelter under limited liability. Directors are jointly and severally liable. It is the directors who manage the assets and control the company’s day to day affairs. Directors are liable personally to pay losses suffered by the Company following an act which is wrong, negligent, outside the Company’s authority, beyond their power, or which evidences insufficient skill and care in managing the Company’s affairs.
Directors and officers are bound by duty towards various stakeholders i.e. shareholders, employees, creditors, customers, competitors, members of the public, government and other regulatory bodies. Any breach or non-performance in the duties can result in claims against them by reason of any wrongful act, actual or alleged, in their respective capacities.
High risk of internal fraud and prevalent issue of corruption raise serious concerns about the liability of corporate directors.
India has learned lot in the recent years and its laws have gradually evolved in this context. There has been a shift in the Indian corporate legal regime with the enactment of the 2013 Act. The 2013 Act also provides statutory recognition to the duties of a director, such as exercise of due and reasonable care, skill, diligence and independent judgment.
One of the key concepts of the Companies Act is the meaning of the term “Officer who is in default”. Under the act, liability for default by a company has been imposed onan officer who is in default. By virtue of their positions in the company, the managing director, the whole-time director and the company secretary directly fall within the scope of this term. Under the 1956 Act, certain key employees like chief executive officer and chief financial officer did not directly come within the ambit of the term, which raised serious concerns because these personnel were viewed as key officials in any company. The 2013 Act corrects this anomaly and significantly expands the scope of the expression “officer in default.”
Directors are bound to use fair and reasonable diligence in discharging the duties and to act honestly, and act with such care as is reasonably expected from him, having regard to his knowledge and experience. In R.K. Dalmia and others v. The Delhi Administration it was held that “A director will be personally liable on a company contract when he has accepted personal liability either expressly or impliedly. Directors are the agents or the trustees of a Company.”
Express liability will usually arise only when a director has personally guaranteed the performance of a contract. Implied liability will arise when a director signs a contract for the Company or mentioning the name but failing to add the vital word “limited” or its abbreviation. This rule rests on the ordinary principle of agency that where an agent enters into a contract without disclosing that he is acting as agent he accepts personal liability. In the case of Penrose v. Martyr, a bill was addressed to a company and omitted the word “Limited” in describing it. The defendant (Secretary to the Co.) signed the acceptance and was held to be personally liable by the Court of Exchequer Chamber. As far as fiduciary duties/obligations are concerned, any breach by any director would visit them with liability. Our Supreme Court has considered this issue of fiduciary liability. It has been observed in Official Liquidator vs. PA Tendulkar.
The question may arise as to whether a D&O liability insurance policy is mandatory as per Companies Act 2013 or any statute for any Indian company, and particularly for a listed company in India. There are certain provisions of The Companies Act 2013 which needs to be looked into in this respect.
Where any insurance is taken by a company on behalf of its managing director, whole-time director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust for which they may be guilty in relation to the company, the premium paid on such insurance shall not be treated as part of the remuneration payable to any such personnel: Provided that if such person is proved to be guilty, the premium paid on such insurance shall be treated as part of the remuneration.
The appointment of independent directors shall be formalized through a letter of appointment, which shall set out:
In short, the Companies Act of 2013 recognizes the right of companies to purchase D&O insurance; D&O insurance is becoming increasingly common; and the purchase of D&O insurance is a prudent business practice, for reasons discussed further below.
Obviously, there is no substitute for good corporate governance where fair play and transparency characterize the working and boards assume responsibility to all the stake holders- and not only to major shareholders. Empowering legislation and best practices in the rulebook may not necessarily guarantee protection against litigation by any stake holder in view of the increasingly complex set of laws that govern the business environment world over and in India. With all the care and caution, should anything go wrong, what is the protection for directors and officers whose liability is personal, unlimited, joint and several. The answer is a good Directors and Officers liability insurance cover which aims to provide relief to directors and officers, who may, notwithstanding all their best intentions and practices, end up in some negligent acts – actual or alleged.
D&O insurance affords protection to directors and officers from liability arising from actions connected to their corporate responsibilities. The policy provides indemnity to the directors and officers in respect of:
Introduction of corporate governance regulations and heightened monitoring does not guarantee that we see the last of corporate governance collapses. Should that collapse happen, there should be protection and relief to the affected parties. D&O insurance does not dilute the need for corporate governance. It offers help as given below:
D&O liability insurance policy, while it is not mandatory, is an important and integral part of corporate governance, as it protects the directors and officers against personal liabilities and also may ensure relief to the victims of corporate governance breakdowns. A D&O liability insurance policy is not a replacement for sound management & corporate governance. But, a good policy helps in as much as it reduces the apprehensions and addresses the concerns of the directors& officers so that they can concentrate on their work to take the company on growth path in a sustained manner. It is stakeholder’s interest and not only shareholders interest that would dictate future direction of the corporate governance and directors need to ring fence their liabilities with an appropriate D&O policy
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