Strictly speaking, the day-to-day management of a company is vested in the hands of its Board of Directors. The Companies Law (Cap. 113) provides that the directors of a company can virtually conduct all the company’s activities, except those that are solely carried out by the shareholders. The law does not provide a clear definition of who is a “director”, but this includes de jure directors, de facto directors, and shadow directors. In regard to who is an “officer” of the company, this can include its managers, company secretary and managing director.
Due to the significant responsibilities vested in directors and officers, the law requires them to conduct themselves within the scope of their powers and within
Based on common law, the D&O of a company owe several fiduciary duties towards the company. These duties arise from the fiduciary position which the directors/officers hold in relation to the company, acting in their capacity as the company’s agents.
The duties that arise from the directors’ fiduciary position are:
- The duty to act in good faith (bona fide) at a level of professionalism they reasonably believe to be in the interest of the company.
- The duty to exercise their powers within the scope provided by the articles of association of the company, and for the purposes that they are vested to them.
- The duty to exercise independent judgement.
- The duty to avoid a situation in which they have, or can have, a direct or indirect conflict, which may conflict with the interests of the company
Apart from the liability that can arise from a breach of duty, the directors and officers must be wary of any breach of the provisions of the Civil Offences Law, Companies Law, CySec Law, and several other Laws, whose breach can render a director personally liable for the financial loss suffered by a third party, due to their negligence, wrongful acts and/or omissions.
Who can claim against a director/officer of a Company?
- The Company
- Shareholders
- Regulatory bodies/Official Authorities
- Employees
- Creditors and Investors
- Third parties and Competitors
Real Life Examples
Breach of fiduciary duty:
- The creditors of a company that was in financial difficulties and in need of capital, sued its directors and officers for failure to identify, evaluate, negotiate, and secure the sale of company assets in a timely manner, which resulted in the company defaulting on its outstanding loans.
- The investors sued a company alleging that some of the company’s officers had personal connections to a third-party contractor hired to re-construct the company’s assembly line and that they hired that contractor to further their personal interests, not the interests of the company.
Misrepresentation
- A company negotiated a large contract with a customer. As a condition precedent, the company was required to have certain financial and human resource assets in place to satisfy the production and delivery requirements of the contract. The directors misrepresented the company’s revenues and capabilities and after being awarded the contract, the company was unable to meet the terms. The customer sued.
Fraud
- A government authority brought criminal proceedings against a construction company’s directors and officers, alleging conspiracy and bribery. The claim alleged that the company participated in fraudulent activities, resulting in the award of a state contract. The construction company’s legal defence costs alone were $4.2 million.
The Solution
Even decisions made with the best of intentions can be scrutinised. Legal actions and investigations that allege director misconduct cannot be ignored and defending them to prove innocence can be extremely time-consuming and costly, both for the director personally and for the Company itself. Thus, purchasing a D& O insurance policy is a useful risk management tool for every company, of any type and size.
Directors and officers (D&O) liability insurance provides financial coverage intended to protect individual directors and officers from personal losses if they are sued as a result of actual and/or alleged breach of their duties, wrongful acts, errors, and omissions. Such coverage can extend to defence costs arising out of criminal and regulatory investigations/trials as well; in fact, often civil and criminal actions are brought against directors/officers simultaneously. It can also reimburse the insured company in case it has paid the claim of a third party on behalf of its directors in order to protect them.
What is not covered:
- Pre-existing legal costs
- Damages recoverable under previous Insurance Policies
- Fraudulent acts/ Illegal financial gain
- Liability arising out of environmental pollution (exceptions apply)
- Liability for Death/Bodily Injury & Property damage
Ellada Palmyri
Qualified Insurance Broker
FLMI, MBA, BA Accounting
Email: [email protected]
Tel.: +35799603199