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Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Officers of a Bermuda company (including directors) may be held liable for breach of duty. A director owes a fiduciary duty to the company to act honestly and in the interests of the company as a whole. In the discharge of those duties, a director must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Where a company becomes insolvent, the company’s interests include those of its creditors.
Under Section 247 of the Companies Act 1981, a director may be found personally liable if he or she has:
- mismanaged money or property belonging to the company;
- retained or become liable or accountable for any money or property belonging to the company; or
- been found guilty of any misfeasance or breach of trust in relation to the company.
A director may also be found personally liable if he or she has permitted the company to trade fraudulently – for example, by continuing to incur liabilities when the director knows that the company has no prospect of being able to repay or discharge those liabilities.
A parent company is not liable for its subsidiaries’ debts on insolvency.
What defences are available to a liable director or parent company?
An officer’s duty is owed to the company, not to its shareholders or creditors; thus, a company acting through its liquidator is normally the only proper claimant in respect of breaches of duty on the part of a director. The bye-laws of the company may (and in most cases do) exonerate a director from liability to the company for any loss that has been sustained as a result of his or her breach of duty, except for breaches involving fraud or dishonesty. An indemnity provision is also usually included, which makes the company liable to reimburse and indemnify the officer for losses that he or she incurred or liabilities to which he or she may become subject as a result of serving as the company’s director or officer.
Companies may purchase directors’ and officers’ liability insurance. The court has discretion to grant relief in respect of negligence, default or breach of duty or trust, provided that:
- the director acted honestly and reasonably; and
- the court considers that, in all circumstances, it is reasonable to excuse him or her for the alleged negligence or breach of duty of breach of trust either wholly or in part.
What due diligence should be conducted to limit liability?
Some companies will have different levels of exoneration and indemnity; however, the vast majority of companies will include exoneration provisions for any breach of duty, except for those involving fraud or dishonesty on the part of the individual officer. In addition, officers who are also employees may have separate employment contracts which contain exoneration provisions, and care should be taken to ensure that these contracts are consistent with the scope of the company bylaws. Where companies have purchased directors’ and officers’ liability insurance, the precise terms of that cover should be reviewed, and consideration should be given as to whether the cover is Side A, Side B or Side C-type liability.
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