On board: liability and indemnity
First Published in The Royal Gazette, Legally Speaking, May 2018
Now more than ever, company directors must understand and appreciate not only the duties and obligations that accompany their role but also the exoneration and indemnity mechanisms available to them and the limits to such provisions.
That is because international standards of corporate integrity and transparency are growing features of cross jurisdictional financial initiatives. The result is an increased level of legal and regulatory compliance and accountability for companies, which must adapt their practices in response to the added responsibility.
In connection with the global effort to support effective levels of managerial transparency, the Bermuda Proceeds of Crime Amendment Act 2016 was amended recently resulting in the insertion of a provision for a register of directors in the Companies Act 1981 (Companies Act). The amendment requires that a Bermuda registered company file with the Registrar of Companies (Registrar) a list of its directors to be maintained by the Registrar and kept available for public inspection.
A company’s register of directors must reflect a complete and current record of its directors and will include the full name and address of individual directors or the company name and registered office address in the case of corporate directors. The amendment is in connection with Bermuda’s compliance with the current Financial Action Task Force (FATF) requirements and recommendations. FATF is an inter-governmental body that aims to set regulatory standards and develop procedural measures to counter money laundering, terrorist financing and other misuses of the international financial system.
Ultimately, directors have certain duties that are owed to the company as a whole. In exercising such duties, directors are responsible for, among other things, ensuring that the company operates soundly and within its applicable legal framework. In doing so, directors must be fully informed and free from conflicts (unless otherwise disclosed and where they may continue to act in accordance with a company’s bye-laws) when making decisions in respect of the company so as to avoid being held liable for not satisfying their duty of care or acting with an improper motive. The Companies Act provides for certain circumstances where directors can be liable for civil and criminal penalties and the increased scrutiny on companies and their operational responsibilities makes it vital that directors be aware of and understand these statutory liabilities.
Statutory liabilities under the Companies Act include loss suffered by subscribers of shares in connection with untrue statements made in a prospectus; loss, damages or costs suffered by a prospective shareholder where a director knowingly contravenes, permits or authorises the contravention of provisions of the Companies Act relating to the allotment of shares; and receiving loans from a company without the approval of the shareholders.
Certain other statutory liabilities apply to companies in liquidation including failing to disclose or deliver assets to a liquidator; falsification of books and records; and knowingly conducting business with the intent to defraud creditors.
Statutory protections can be afforded to directors in limited circumstances via indemnity provisions and insurance. The Companies Act permits a company to exempt and indemnify its directors by including in the company’s bye-laws or in any contract or other arrangement between the company and the director a provision for exemption from, or indemnification in respect of, any loss arising or liability attaching to the director arising in respect of any negligence, default, breach of any duty or breach of trust.
However, such indemnity provisions are limited and will not apply to any liability attaching to a director arising in respect of any fraud or dishonesty. Subject to the limitation above, this exemption will cover all liabilities, loss, damage or expense and may also cover any liabilities that the director incurs defending any proceedings where relief is granted, where the director is acquitted or where the director is awarded a favourable judgement.
Additionally, companies are permitted to purchase a policy of insurance for directors providing protection against any liability incurred as a result of a director’s conduct and in particular for failure to exercise their duties of care, diligence and skill as well as any liability arising from any negligence, default, breach of duty or breach of trust of a director with the exception of contraventions connected to fraud or dishonesty. Any supplementary limitations on the scope of the insurance will be found within the policy.
Although such protections and safeguards are available to directors, it is important to note that they are not limitless. Further, given the increased initiative on a global level to implement sound corporate and financial policies and procedures, there is a greater public demand for good corporate governance, transparency and responsibility on the part of management.
Directors should therefore take a proactive approach to exercising their duties given the current impact of international standards of governance on financial centres and companies.
