DIRECTORS LIABILITY AND INSURANCE COVER

Friday, May 19, 2006
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Directors Liability and Insurance Cover
By Lezel Crook
 
The Companies Act (“the Act”), specifically section 247 of the Act, renders void any provision in the articles of a company or stipulation in a contract with the company, purporting to exempt or indemnify a director, who is guilty of any liability in respect of negligence, default, breach of duty or breach of trust, in relation to the company. The Act provides further in section 424 that when the business of the company is carried on recklessly or with an intent to defraud creditors, a court of law may (following a prescribed application process) declare that any person who knowingly partook in such activity be held personally responsible, without limitation, for all or any of the debts or other liabilities of the company.
 
Besides the duties placed on directors by the Act, there are also prescribed fiduciary duties owed to the company which arise in terms of the common law, as the director stands in a fiduciary relationship with the company. These include, amongst other things, a duty to not to act arbitrarily, capriciously or for an improper purpose. 
 
Due to the onerous duties imposed on directors by the Act and the common law it would desirous for a director to obtain insurance cover in the event that such director incurs liability. It is not however possible to contract out of or indemnify a director from reckless and/or fraudulent conduct. Nevertheless, it is possible for a director to obtain insurance cover arising from liability in respect of negligence, default, breach of duty or breach of trust. The insurance policy concurrently serves as an indemnity to the director (and consequently the company in question) because such insurance contract is not void as it does not attempt to avoid liability on the director’s part; instead it merely covers the company’s loss in a situation where the director has incurred the liability and the director is unable to pay the damages. 
 
Further, a company may protect itself by taking out insurance against liability of a director towards the company in respect of negligence, default, breach of duty or breach of trust, which would serve to protect its directors at its own expense. The company would then be able to recover its losses in a situation when a director is unable to compensate the company for incurring liabilities. However, only the director can be indemnified against the liability against the company and in truth the company will be taking out insurance cover on behalf of the director.
 
There are companies specializing in risk and financial services that will provide directors and companies advice and offer insurance cover of this nature.