Trinidad and Tobago: Shielding Directors And Officers From Personal Liability For Y2K

I have been emphasising senior management’s responsibility to lead their company’s response to the Y2K challenge, pointing out that directors and officers are under a legal duty to "exercise the care, diligence and skill that a reasonably prudent person would exercise". This duty applies to the management of Y2K risks and any director or officer who fails to live up to this standard is exposed to personal liability. However, while management can and must act to reduce Y2K risks, such risks cannot be eliminated. Directors and officers should therefore consider taking further steps to shield themselves from potential personal liabilities. You may want to consider this as an important aspect of your personal contingency planning for Y2K.

Under the new Companies Act, a company is allowed to indemnify directors and officers, and to obtain insurance for them, even where they have failed to "exercise the care, diligence and skill that a reasonably prudent person would exercise". This is so provided that they have acted honestly and in good faith and in the best interests of the company. Particularly as we approach this period when all companies face the increased business risks associated with Y2K, directors and officers should take this opportunity to put their house in order with respect to the indemnities and insurance coverage being provided to them against potential personal liabilities. If a director or officer is not satisfied, he should consider resigning.

Generally speaking, the new Act merely allows a company to indemnify a director or officer against personal liabilities. It does not require the company to do so. For a director or officer to require an indemnity to be given to him, there must be some positive obligation imposed on the company to provide it. This obligation can be imposed by the company’s By-laws or by a separate contract.

Directors and officers should never assume the existence of an appropriate By-law providing an indemnity, but should look into this matter carefully. They should also take the extra step of getting an express contractual right to an indemnity. This eliminates technical hurdles about enforcing the non-contractual By-laws. It also ensures that the company cannot unilaterally change the right to the indemnity by simply altering its By-laws.

The precise terms of the indemnity being offered to the directors and officers also need to be examined carefully. Directors and officers will want to make sure that their indemnity clauses are as broad as possible and that they cover the widest range of Y2K risks for which they may potentially become personally liable.

In situations where a director is appointed to the board of a company within a group, he may want to obtain contractual indemnities from other companies in the group, e.g. from the holding or parent company. The same principle may apply:

• where a director has agreed to his appointment at the request of another party such as a significant shareholder; and
• where an officer has agreed to be seconded to another company.

In such cases a director or officer should consider obtaining suitable indemnities from the parties at whose request he has assumed the additional responsibilities. In some of these and similar situations, a unanimous shareholders’ agreement may also be used as a shield against potential personal liabilities.

D&O Insurance

Additionally, although insurance cover for directors and officers is only available subject to the same "good faith" requirements as apply to indemnities, it is advisable that it be obtained if at all possible. An indemnity is of little value if the company that is to provide it has become insolvent. Insurance cover is therefore particularly useful because many instances of director's liability arise in circumstances where a company is insolvent.

However, it is also important to note that the coverage and exclusions under a policy of insurance must be carefully reviewed, as there may be restrictions in the policy beyond the "good faith" requirements imposed by the new Act. Unfortunately, this may frequently be the case, as Y2K exclusion clauses in insurance policies have become prevalent. Nevertheless, you should carefully examine any policies as not all may contain such exclusions. Further, even where Y2K exclusion clauses exist, some but not all are total exclusions. You should try to resist the imposition of unreasonably broad Y2K exclusions and, if necessary, work with your insurance broker to shop around for the best available cover. In doing so, however, you will have to be realistic and recognise that there will be significant limitations on what is available.

Directors and officers should also consider with their brokers whether or not it might be appropriate for them to notify their insurers of possible or anticipated Y2K claims even at this time. This is particularly so as policies may mandate claims notification upon the insured becoming aware of circumstances which can give rise to a claim. Depending on the terms of your policies, immediate notification might be necessary to preserve your rights and to maximise your chances of recovery. Again, this is an aspect of putting your house in order, by taking steps to understand and follow the rules and procedures applicable under your insurance policies. It is obviously important that you do this even in the best of times. However, it may be of particular significance to attend to this matter as we approach a period of increased business risks associated with Y2K.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.