Directors and Officers Liability Insurance
Even if you are not the director of the company, your signature on any contracts representing the Company can make you personally liable, under the provision of Section 140 & 354 of the Companies Act 1965.
Provisions indemnifying directors or officers.
140. (1) Any provision, whether contained in the articles or inany contract with a company or otherwise, for exempting anyofficer or auditor of the company from, or indemnifying him against,any liability which by law would otherwise attach to him in respectof any negligence, default, breach of duty or breach of trust, ofwhich he may be guilty in relation to the company, shall be void.(2) Notwithstanding anything in this section a company may pursuant to its articles or otherwise indemnify any officer or audit or against any liability incurred by him in defending any proceedings,whether civil or criminal, in which judgment is given in his favour or in which he is acquitted or in connection with any application in relation thereto in which relief is under this Act granted to him by the Court.
Power to grant relief
354. (1) If in any proceeding for negligence, default, breach of duty or breach of trust against a person to whom this section applies it appears to the Court before which the proceedings are taken that he is or may be liable in respect thereof but that he has acted honestly and reasonably and that, having regard to all the circumstances of the case including those connected with his appointment, he ought fairly to be excused for the negligence,default or breach the court may relieve him either wholly or partly from his liability on such terms as the Court thinks fit.(2) Where any person to whom this section applies has reason to apprehend that any claim will or might be made against him in respect of any negligence, default, breach of duty or breach of trust he may apply to the Court for relief, and the Court shall have the same power to relieve him as under this section it would have had if it had been a Court before which proceedings against him for negligence, default, breach of duty or breach of trust had been brought.
(3) The persons to whom this section applies are—
(a) officers of a corporation;
(b) persons employed by a corporation as auditors, whetherthey are or are not officers of the corporation;
(c) experts within the meaning of this Act; and
(d) any persons who are receivers, receivers and managersor liquidators appointed or directed by the Court to carryout any duty under this Act in relation to a corporationand all other persons so appointed or so directed.
Here are some ‘risky facts’ to ponder about when you are accessing the risk faced everyday by business entities.
Shareholders
- Prospectus contains an untrue statement of material fact or misstated a material fact
- Prospectus fials to state a material fact required to be disclosed.
- Failure to maximize shareholder’s value
- Failure to act in the best interest of the company/shareholders
- Breach of Fiduciary Duty
Example: Following a restatement of past earnings, the share price of a local company listed on Bursa Malaysia fell and this was investigated by the Securities Commission. As a result several shareholders filed a derivative class-action lawsuit.
Employees
- Wrongful termination
- Sexual harassment
- Employment-related defamation
Example: After repeated warnings regarding absenteeism and poor performance, an employee takes a director and a department manager to court – alleging unfair treatment.
Regulatory Bodies
- Failure to comply with listing requirements and regulations, especially with regards to corporate governance initiatives
- Failure to operate facilities in a responsible manner – e.g. employees’ health and safety or pollution
- Allegations of not acting in the best interests of shareholders but for personal profit or advantage (i.e. insider trading)
Example: The Securities Commission launches an investigation into 2 bank directors after allegations of insider trading. In order to counter these allegation, a comprehensive defense case must be conducted, incurring considerable cost.
Customers
- Breach of contract
- Unfair trade practices
Example: A customer sues the director of marketing and sales after advertising materials approved by the director provide incorrect pricing details of the product range.
More examples…
Directors: Tom, a former chief financial officer is made redundant following the merger of two companies. Tom sues the current chief executive officer alleging bad faith and wrongful termination.
Suppliers: A supplier initiates litigation proceedings against a director who has allegedly made the company breach the contract by failing to procure the company’s payment for goods received or services provided within a specified period of time and this leads to the supplier incurring financial loss.