A claim by Safeway Stores against eight former directors and employees for up to £16.5 million has been in the public eye of late. Although some press reports have suggested that the claim has been brought under UK competition law, in fact it is a simple claim against former directors and employees for breach of their duties as employees or fiduciary duties as directors.
For the first time, the courts have said that in principle a company can recover a fine or penalty from former directors and employees. In December 2009, the Defendants tried to stop the claim going ahead on this and other objections, but the High Court gave Safeway permission to go to a full trial.
The background to the claim is the fine of up to £16.5 million imposed on Safeway in 2005 for its part in collusion with other retailers to manipulate the price of dairy products in the UK. Safeway alleges that the eight Defendants were responsible for this collusion. According to the High Court, the Defendants have not so far suggested that their conduct was in any sense approved by the boards or shareholders of relevant Safeway companies.
The insurance angle
It has been speculated that the purpose of this claim is to trigger the benefit of insurance in place either for Safeway itself or for the former directors and employees.
Conventional Directors & Officers (D&O) insurance exists to protect directors from claims by third parties, rather than from claims by the company that is paying for the insurance. Therefore, if there is an insurance angle, it is more likely that the claim is being used to trigger a "corporate reimbursement" insurance policy taken out to protect the company from the acts of its directors or employees. Obviously, any insurance claim is subject to policy wording and exclusions. However, if Safeway does have such a policy and there is no exclusion for loss resulting from breach of duty by employees or directors, it may be able to trigger reimbursement if it succeeds in the court proceedings.
Consequences for directors and senior employees
Being sued for a share of £16.5 million is an uncomfortable experience for any individual, even if the purpose of the claim is merely to trigger recovery under an insurance policy.
For existing directors, any agreement by the company to exempt them from liability for breach of duty, breach of trust or negligence is void under the Companies Act 2006. The type of qualifying third party indemnity that is permitted by that Act would not have helped the ex-Safeway directors because this is not a third party claim.
The only certain way for directors to limit their exposure to the company for their own acts or omissions is to take out insurance against this specific risk – effectively this is professional indemnity insurance. This would be within the law, but is the UK corporate world ready for what would in some senses be a kind of limited liability directorship? Is the UK insurance market ready to offer such policies for company directors?
The novelty of the facts in this case – very few companies sue former directors for such large amounts – means that these developments are probably some way off. In the meantime, directors should ensure that they understand the company's insurance arrangements and the extent and limitations of D&O or corporate reimbursement insurance.
On leaving a company, a director should consider:
- seeking a waiver by the company of claims against them, to the extent permitted by law, and/or a warranty from the company that it is not aware of grounds for any claim that cannot be waived;
- continuation of D&O insurance on terms that they properly understand, in particular in relation to the nature of the risks covered and the run-off period of the policy.
For senior employees who are not directors, there is nothing to prevent a company indemnifying them for breach of duty, although few companies are likely to want to do so.