Directors Liability – The Director’s Nightmare

A CASE STUDY

As a company director your liability for the activities carried out during your tenure continues even after you have retired. It is essential that you protect yourself from the potentially crippling cost of litigation should a dispute occur at a later date.

Imagine finding yourself in the following situation:

In 2011 a law firm, working on a “no win-no fee” basis, sues a company in which you held a position as a director until 1995. The law firm adopts a “shotgun approach” and sues anyone who could possibly be found liable. This strategy ensures that they have the maximum number of parties fighting each other over liability. The theory is this will increase the number of parties who will contribute to any settlement that may be reached. As a result they have sued you, personally, as a former director.

Although confident your innocence will prevail you need to consider the following questions:

WHO IS GOING TO PAY YOUR LEGAL FEES?

Under the terms of the company’s constitution you may have been provided with an indemnity for any liability that resulted from your actions as a director. However, once you resigned as a director the right to that indemnity ceased. Likewise, the terms of your director’s and officers liability insurance policy, requires that the policy be valid at the time the claim is made, rather than when alleged wrong occurred. Unfortunately you have not, maintained a valid policy for directors and officers insurance after you retired. All of this means you will have to bear the cost of your legal defence. If the matter goes to court the cost of preparing your defence will be substantial. If you are found liable you may also be required to pay some, or all, of the other parties legal costs. This will be in addition to compensation that the court awards the person who sued you in the first place.

HOW ARE YOU GOING TO DEFEND YOURSELF?

As you are no longer employed by the company it will be difficult to gain access to documentation and/or statements from former employees, both of which you will need to prove your innocence. Whilst the law does enable you to obtain copies of all relevant documentation, this process is often slow and expensive. It is also difficult for an inexperienced litigant to know exactly what documents are relevant. Without that knowledge it is impossible to ensure that you have been provided with all the necessary information. Remember it is in the company’s interest for you to remain involved to share the possible cost of the claim and to muddy the issue of liability.

COULD YOU HAVE DONE ANYTHING TO PREVENT THIS FROM HAPPENING?

By putting the right documentation in place you can ensure that you are provided with an on going indemnity. This will protect you from the costs associated with litigation arising from activities of the company whilst you were a director. It will also ensure you have access to the books and records should you need it.

We have considerable experience in implementing strategies to protect director’s assets and reduce liability. If you have not considered these issues please contact our office.