Directors and Officers insurance is critical protection, says litigation expert
Company directors and officers can be personally ruined by litigation, says John Neaves of Norton Rose Attorneys – and every director is entitled to the protection of proper Directors and Officers (D&O) insurance.
“I would not be prepared to sit on any board unless I was personally covered by a D&O policy with adequate sums insured,” says Neaves, who is due to speak at the annual Chartis D&O conference on May 24. “You don’t need to do something wrong to find yourself the target of a legal attack. Economies go up and down, surprises happen, and companies get liquidated despite the best intentions and best efforts of their directors.”
When a liquidation occurs, says Neaves, liquidators will often apply to the court for a hearing under Section 417 of the old Companies Act – and directors will be subpoenaed to appear, often under very unfair conditions. “The ordinary rules of fair process don’t apply in such a hearing and it can be exceptionally hard on individuals as well as expensive,” he says. “The power of legal representatives is limited, but it helps a lot if people at least have the opportunity to sit down with skilled lawyers who can prepare them for the process, refresh their memories and offer support.”
If litigation follows the hearings, there is more trauma and further legal expense, adds Neaves, who says legal costs in such a case can easily top R10m. “Remember that those who are going through this don’t have income – if your company has been liquidated and you’re in the middle of litigation, you are very unlikely to find a job elsewhere. And if the case goes against you, the judge can attach your personal assets to cover damages.”
Having adequate insurance cover can make all the difference, says Neaves. “Legal proceedings will always be deeply traumatic, but being insured will give you the comfort of good legal advice and save you and your family from financial ruin. No policy will pay out in the event of actual fraud or criminal misconduct, of course; but you don’t have to act criminally to be found liable.”
It’s not sufficient to rely on a policy that covers only the company, notes Neaves. “’Indemnifying the company is a necessary first step, because creditors or others who have suffered a loss will always approach the company first. But directors can also be sued in their individual capacities, so personal insurance is essential. No matter how wealthy you may be as an individual, having to fight a complex legal action on your own will break you.”
The growing popularity of class actions in South Africa will increase the risks for local directors and company officers, adds Neaves. “We may get to a situation like the one that exists in the United States, where a share price collapse will almost certainly trigger a lawsuit regardless of what actually happened. Frivolous lawsuits are a fact of life.”
Neaves will join Norton Rose colleagues Sandra Sithole and Jeffrey Kron at the Chartis D&O conference to discuss in more detail how the D&O litigation landscape has shifted since the inception of the new Companies Act. The conference, to be held at the Hyatt Regency in Rosebank on Thursday May 24, also features a presentation by Andrew Graham of Chartis Europe on risk solutions for mergers and acquisitions.
Parties interested in attending the D&O conference may contact Liza Maresch via email at email@example.com
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