The Companies Act 2013, comes with refreshing changes that protect the interests of shareholders and other stakeholders. These changes, directly impact the roles of the directors and officers of companies and make them more susceptible to risks.
The changes enhance the responsibilities on the directors and officers and increase the chance of them being held personally accountable for acts they commit unintentionally or wrongfully, thereby attracting significant legal costs or at times other financial burdens. As a consequence, the directors and officers liability insurance (D&O) is gaining popularity.
D & O policy can protect directors and officers or the company itself from claims arising and provide cover against any legal expenses and in defending against criminal or civil actions arising out of such claims.
This cover is quite popular in the West, however, its popularity has been growing in India with growing awareness of various remedies under the law to get compensation from erring directors.
The surge in companies opting for D & O policies can be attributed to the following changes in the 2013 act.
Deduction of premium from remuneration : The escalation in the procurement of D&O policies also emanates from section 197(13) of the 2013 act, whereby D&O insurance has been conferred recognition. The provision states that if an insurance policy has been taken out by a company on behalf of any of its directors or officers including the CEO or CFO, indemnifying any of them against any liability (i.e. negligence, default, misfeasance, breach of duty or breach of trust) which may be proved in relation to the company, the premium paid is not to be treated as part of the remuneration payable to any such directors or officers. However, if any of these persons are proved to be liable, the premium paid on such insurance will be treated as part of the remuneration.
Definition of “officer in default” : Section 2(60) of the 2013 act widens the ambit of the officers who can be held in default by also including key managerial personnel, share transfer agents, registrars, merchant bankers and every director in respect of a contravention of the provisions of the act who was aware of such contravention by virtue of being the recipient of any proceedings of the board or participation in such proceedings without objecting to the proceedings, or where the consent of such a director was obtained.
Codification of the duties of the directors : Section 166 of the 2013 act specifically lays down a list of duties that each director should abide by, including but not limited to exercising their duties with reasonable skill and care and acting in good faith, and also stipulates a penalty ranging from ₹100,000 to ₹500,000 may be levied on a director if the provisions of the section are flouted.
Class action : After the experience or various scams in the past, there was a realization that investors and shareholders in India could not file a suit against the company for damages. This gap has been remedied by section 245 of the 2013 act, whereby a class action suit may be brought against the company or any of its directors by its members or depositors before the National Company Law Tribunal.
Solution : If a company has D&O insurance, then in a situation where a class action suit has been filed, the legal expenses for all court proceedings can be recovered and would be recoverable even before the court has pronounced its judgment. The essence of providing such coverage is to ensure that directors who work in the best interests of the company are secure and are protected in case such a suit arises. It is essential to note that D&O policies contain exclusions whereby if the act of the insured is dishonest and malicious and has been knowingly committed by the concerned director or officer then insurance cover will not be provided.
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