One of the purposes of incorporation is to absorb and contain liability within the corporate shell: the so-called corporate veil, behind which directors used to feel reasonably safe. However, a director can in certain circumstances be personally liable to the company, its liquidator, its shareholders, third parties and any of its regulators, such as the Financial Services Authority (FSA), Health and Safety Executive, Information Commissioner, Pensions Regulator or Office of Fair Trading. Directors may also incur considerable expense in defending claims, investigations or even extradition and, in addition to the recent potential extension of litigation by derivative action, may face claims arising out of the tougher regulation brought into force as a result of the recession. Even when the director is convinced that the allegations made are completely unfounded, the costs of defending their position can be extremely high, a fact gruesomely appreciated by the departed directors of Equitable Life prior to the abandonment of all claims against them by the incoming board, apparently after £20m in defence costs are rumoured to have been incurred. Here, Jeremy Hill, partner, and Christopher Henley, international counsel, at law firm Debevoise & Plimpton LLP, highlight some of the main areas in which careful judgment should be exercised by a director, or, more usually, the company secretary overseeing cover for the board. It should be remembered that D&O policy wordings are complex and the smallest error could result in a large gap in coverage.
Online Published Date:
15 October 2009