Directors: How to limit my liability – The Fundamentals – Part 3

duties as a director

Over the last two weeks, we have been exploring the topic of company directors. Welcome to the final post! If you find yourself here for the first time, we highly recommend that you read the first two posts before continuing with this post. Read post 1 and post 2 before continuing here.

In our previous post we discussed the duties of directors. We noted that being able to understand your duties is a crucial step in managing your liability as a director. Now that we have covered this, we can engage with the subject matter of this post: managing your liability as a director.

Your risk as a director

managing your liability as a director managing your liability as a directorWe have mentioned that your risk as a director is high. This risk of personal liability is unfortunately compounded by the fact you are human. What we mean by this is that it is inevitable you will occasionally make a bad decision. Even if you do not make bad decisions, you will probably at some point acquiesce to a bad decision made by another director.

Do not be disheartened, though! This is honestly the reality of the business environment. If you are aware that bad decision-making is inevitable, you can manage the risk. Consider yourself now AWARE!

Managing your liability as a director

In order to avoid liability you will have to show that you acted honestly and reasonably, and that your decisions were both rational and informed. On a more specific level, this means:

  • You took “reasonably diligent steps to become informed about the matter” in question. That is, you cannot just claim ignorance on any aspect of the matter. If you should have known about it, you will find yourself in trouble.
  • You have disclosed any personal financial interests in the matter as per the Act’s requirements.
  • You had a “rational basis for believing, and did believe, that the decision was in the best interests of the company”.

Note that record keeping is critical as it will provide firm evidence regarding your actions.

You may rely on employees, internal committees and outside professional advisers to provide you with information. However, if you rely on such persons, you must “reasonably believe” such persons to be reliable, and competent to give you the advice or information in question.

The bottom line is that your first line of defence against any claim is to ensure that you are fully informed as to the nature and extent of your duties as a director (what we have been saying throughout this blog series!). Also, be sure to act diligently, reasonably and honestly in every situation. Note that this does not mean that you have to act perfectly. The law does not expect you to be superhuman.

Another line of defence

In addition to the above, there is another form of protection that you can and should take advantage of. This is your indemnification given by the company against any claims, paired with directors insurance. It covers both your liability and the company’s resultant payouts and expenses.

Beware though, the company cannot indemnify/insure you for any wilful misconduct, wilful breach of trust, or breach of the prohibitions relating to acting within your authority, unlawful trading or fraudulent actions/omissions. Also, a director’s fines cannot, except in limited special circumstances, be paid by the company. Lastly, you should consult the company’s MOI and rules to ensure that such cover is not prohibited.

Do you need to manage your risk?

If you are a director and believe you need advice on any aspect of what was covered in this post, please do not hesitate to contact us at [email protected]. If you know of a director for whom this post might be beneficial, please share this post with that person. Finally, if you have enjoyed this series on directors, please let us know and subscribe to the blog so that you can be first to get new content from Gunstons.

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