If directors act correctly, they may not be held liable for debts. As it is a well-acknowledged fact that company is a separate legal entity, but directors may be held liable for company’s insolvency if there has been some wrongful trading. A director can be held liable for corporate debts in certain scenarios such as:
– If he has signed a personal guarantee.
– If knowing the company is insolvent, he has continued to prioritize shareholders over creditors.
– If he has sold company assets below their market value or for free.
– If he has overpaid himself from the company’s account, creating an overdrawn director’s loan.
– If he has raised funds to repay creditors via fraudulent means, obtaining finance by providing inaccurate information.
– In case of wrongful trading or breach of duty, or any misleading statement.
Typically the Directors are the first ones to be blamed when a company becomes insolvent or suffers significant losses. Apart from these, a director can be sued for racial discrimination claims by employees, for security-related claims, or for management buyout claims. As the directors and management are independent from each other so it becomes a requisite for a company to avail a protection solution in order to contest against contingencies and financial shortfalls. Directors and Officers Liability Insurance is like a lifesaver in such cases as the core purpose of a D&O policy is to provide financial protection for directors against the consequences of actual or alleged ‘wrongful acts’ while acting within the scope of their professional duties.
D&O policy offers protection to directors and officers when they are held liable by:
- Employees – for discrimination, harassment, breach of employment contract, defamation, misleading misrepresentation, wrongful employment practice, etc.
- Creditors – alleging that the director allowed the company to trade whilst knowing it could not pay its debts.
- Government agencies – directors and officers may be personally liable for breaches of hundreds of statutes.
- Competitors – Trade Practices Act claims brought against the directors for misleading and deceptive type conduct.
- Shareholders – alleging that the directors mismanaged the operations of the company and its funds.
Directors and Officers liability insurance protects the past, present and future directors and officers of profit or nonprofit companies (Listed and Non-Listed) from damages resulting from alleged or actual wrongful acts the Director and Officers may have committed in their positions. The policy provides protection in the event of any actual or alleged error, misstatement, omission, misleading statement, or breach of duty. It provides indemnity to directors and officers for legal costs, damages and expenses incurred, arising from claims brought against them personally – for acts in their executive capacity.