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Expert Risk Articles

Risk Management Best Practice

The checklists below have been designed as a practical guide to the potential duties and liabilities of directors of companies. They are general non-exhaustive checklists and are not jurisdiction-specific. They should not be used as a substitute for professional advice on issues within your jurisdiction and should not be taken as providing legal advice on any of the topics addressed.

View the Global Director's Checklist as a shareable pdf
View the Particular D&O Exposures Checklist as a shareable pdf

Global Director's Checklist

Liability for Loss

Company indemnification

Ensure you are fully aware of:
• the circumstances in which the company will indemnify you
• the circumstances in which your decisions may be ratified by the company
• D&O insurance in place to cover you as a director of the company
• exclusions in the policy– for example, it is common for insurance to exclude
cover for loss due to fraud, dishonesty, wilful default or criminal behavior
• the fact that penalties imposed are often uninsurable.

Civil liability

Be aware of the following possible claims against directors:
Claims by the company for breach of any duty owed to the company whether under company documents, statutory duties or fiduciary duties
Derivative actions brought by one or more shareholders against the company’s directors, seeking redress on behalf of the company for a wrong committed by those directors
Shareholder oppression brought by one or more shareholders against directors and/or the company itself where the conduct of a company’s affairs has been unfairly prejudicial or discriminatory against the interest of members
Claims by third parties, though rarer, can be brought in contract, tort or under statute.

The following are a few examples of where liability may be established:
– in contract, if a director personally guarantees his/her company’s debts
– in contract, if the director does not make it clear that s/he is contracting as the agent of the company, and not on a personal basis
– in contract, if the director enters into a contract on behalf of the company but exceeds his/her authority and the company sets it aside
– in tort, if the director makes a fraudulent or negligent misstatement which induces a third party to enter into a contract with the company or otherwise acted to their detriment.

Criminal liability

There are a number of criminal exposures for directors, including but not limited to:
• wrongful trading
• theft
• fraud
• money laundering
• bribery
• market manipulation.

Regulatory liability

In addition to civil and criminal liabilities, note that directors are also subject and face potential exposure to liability under financial, competition, health and safety and environmental regulations.

 

Your Duties

Company duties

Review company documents carefully and ensure you understand:
• the duties you owe to the company
• which powers may be exercised and in what circumstances
• what restrictions are placed on you
• whether you face personal liability
• whether directors’ liability is joint or several.

Statutory duties

Directors will often be subject to legislation governing directors’ duties to the company and its members.
Ensure that you:
• understand and comply with the duties in force in your jurisdiction
• consider how they can apply to all aspects of your role
• consider to whom the duties are owed – the company or its shareholders?
• consider what duties will be owed if the company faces financial difficulties.

Do you have to act in the best interests of creditors?
• if you possess a specialist skill which you utilize in conducting your duties as a director, be aware you may be held to a higher standard
• keep detailed records of meetings and decisions taken

Breach of statutory duties potentially exposes directors to claims from the company and/or its shareholders and, in some cases, its creditors. It may be possible in some jurisdictions for directors to be personally liable for the loss.

Fiduciary duties

Directors owe fiduciary duties to their companies. When carrying out your duties as a director, bear the following in mind:
• you may not be able to delegate without express authority
• you must understand and consider the overall risks that impact upon the company’s position in performing your role
• advice provided to you by third parties or advisers (such as accountants or lawyers) should not be relied on unless you have independently understood and considered the relevant issues
• you should not bind yourself as to how you will exercise your discretion in future e.g. by making an agreement to vote in a certain way
• you should consider whether to exercise your discretion where to do so would be advantageous to the company
• you should not personally exploit or take advantage of information or opportunities that you are made aware of due to your role as a director
• where a company is part of a consolidated group, directors must act in the
interests of the company itself, as opposed to the group’s interests.

 

Particular D&O Exposures Checklist

Particular Exposures

Exposures for directors of publicly listed companies

Be aware that directors may be personally liable for loss resulting from untrue or misleading statements in or omission of required information in listing particulars in respect of an offer of securities to the public or an admission to trading on a regulated market.

If the director has been dishonest or reckless regarding the truthfulness of the information provided, they may be subject to both civil and criminal prosecutions. Directors should:
• seek appropriate legal advice
• complete full and proper due diligence
• personally review and query the prospectus or listing particulars before signing anything.

Exposures following Company Insolvency

It is not uncommon for directors to face costly proceedings in circumstances where their company becomes insolvent, as liquidators will carry out extensive investigations into the causes and will often seek to hold persons responsible
and/or to recoup monies lost. Be aware that the following may apply in your jurisdiction:
• you may be under a duty to minimize loss to the company and its creditors as soon as you know (or ought to have known) that there is no reasonable prospect of the company avoiding an insolvent liquidation
• your actual skill, knowledge and experience (and what a reasonable director in your position should possess) may be taken into account
• you may be under a duty to obtain professional advice if at any time there is uncertainty as to the company’s ability to continue as a going concern
• you may subsequently be exposed to director disqualification proceedings if failures are identified.

Bribery

Many jurisdictions are focused on stamping out bribery in companies and have legislated accordingly. It is important to bear in mind that statutes covering bribery are often international in scope

Directors should be mindful:
• that the business, even if based entirely in one jurisdiction, may be held responsible for the acts of its foreign associated persons
• that organizations incorporated elsewhere but carrying on business in another jurisdiction or employing citizens from the other jurisdiction should not assume that they will fall outside the reach of bribery laws

Directors may also be exposed to liability when the company itself is being investigated. In the UK and US, for example, prosecutors can make deals with the company in exchange for lighter penalties. Such arrangements require the full cooperation of the company, which could include the company providing the prosecutor with information and documents during the course of its investigation which can then be used for the purpose of prosecuting directors.

Health Safety and Environmental Law

Directors should be aware of:
• applicable health and safety laws that may expose directors to liability, for example, failing to ensure the welfare at work of employees
• Applicable environmental laws such as how the company deals with waste.
Breaches of these laws may expose directors to civil, regulatory and criminal liability.

Manslaughter

Be aware that directors can, in certain circumstances in some jurisdictions, be
convicted of manslaughter if death is caused as a result of their negligence.

Cartels/Competition

Individual directors who are found guilty of engaging in dishonest anti-competitive
conduct can be personally fined, disqualified and even subjected to imprisonment.

Money Laundering

Most jurisdictions have money laundering laws. Directors carrying out relevant financial business must:
• be aware of the requirements of applicable laws and regulations
• ensure internal processes are in place to identify, record/report on this issue
• provide proper training.

Extradition

A number of jurisdictions have legislation providing for the extradition of individuals.