Directors Part 2 – how to limit your liability

This article first appeared in CA(SA)DotNews 

“The biggest risk is not taking any risk… In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”  (Mark Zuckerberg, founder of Facebook) 

Your increased risk of personal liability is compounded by the reality that you will at times make bad decisions, or acquiesce in bad decisions made by the board of directors – that’s pretty much inevitable in any business environment.

What you must show 

To avoid liability, you must be able to show (record keeping being essential here) that you acted honestly and reasonably, and that your decisions were both rational and informed; specifically that –

• You took “reasonably diligent steps to become informed about the matter” in question.  In other words it is no defence for you to simply say “I didn’t know about this, or about that” – if you should have known about it, you are in trouble.
• You have complied with the Act’s requirements as to disclosure of any personal financial interests in the matter.
• You had a “rational basis for believing, and did believe, that the decision was in the best interests of the company”.

Note that you are allowed to rely on employees, internal committees and outside professional advisers, but not blindly – you must “reasonably believe” such persons to be reliable, and competent to give you the advice or information in question.

In summary, your first line of defence against any claim is to ensure that you fully understand the nature and extent of your duties, and that you act diligently, reasonably and honestly at all times.  Take advice in the slightest doubt!

Insurance and indemnification 

We turn now to another line of protection that you should take full advantage of, namely indemnification by your company against any claims, coupled with insurance (such as “D&O” or “Directors and Officers” insurance) to cover both your liability and your/the company’s associated pay-outs and expenses.

Note however that 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.  Moreover a director’s fines cannot, except in a few special instances, be paid by the company.  Finally, you should also check that the company’s MOI, rules etc do not prohibit such cover.