15 October 2010 by and

Directors' liability insurance under the new Act

The subject matter of section 247 of the current Act dealing with the exemption from or indemnity against liability of directors and officers of a company is dealt with in section 78 of the new Act.

There are various important differences between these provisions. One of these concerns the nature and extent of the insurance that may be purchased by a company in connection with the conduct of a defaulting director.

Section 247(1) of the current Act states that any provision, whether contained in the articles of a company or in any contract with a company, which exempts any director from any liability which by law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company, or purports to indemnify him against any such liability, is void.

However, the proviso to the section goes on to state that a company is permitted to take out insurance "as indemnification against any liability of any director or officer towards the company in respect of any negligence, default, breach of duty or breach of trust".

Two aspects of the proviso to section 247(1) warrant a more detailed consideration:

  • The proviso does not limit the type of conduct against which a company may insure. For example, there is nothing in the proviso which prevents a company from taking out and paying for insurance protecting itself against loss arising from the fraudulent acts or wilful misconduct of its directors.
  • The proviso only permits a company to take out insurance policies against negligence, default, breach of duty or breach of trust by any of its directors and to pay for the insurance premiums of these policies. It is the company that is protected by the insurance policy and not the director. In other words, the insurance policy will cover the damages suffered by the company as a result of the negligence, default, breach of duty or breach of trust by directors, but thereafter the directors will remain liable to the company for their improper conduct.

Under section 78(7) of the new Act, it is envisaged that a company will be able to purchase insurance to protect both a director and the company against any liability or expenses for which the company is permitted to indemnify a director in accordance with section 78(5) of the new Act.

The enabling provisions of section 78(5) read with the limitations in section 78(6) effectively provide that a company will be able to indemnify a director in respect of any liability arising otherwise than due to certain wilful, fraudulent or reckless misconduct on his part or against any fine imposed on him in terms of any national legislation (such as the Competition Act).

Having regard to the two aspects of the current Act highlighted above, it is thus clear that section 78(7) of the new Act provides for a simultaneous restriction and expansion of the comparable provisions of the current Act as follows:

  • A company will in future not be able to purchase insurance protecting itself against a director's liability to the company which stems from certain wilful, fraudulent or reckless misconduct, whereas under the old Act there is nothing preventing an insurer and insured company from contracting to this effect.
  • A company will, however, be able to take out and maintain insurance protecting its directors (again, wilful, fraudulent or reckless misconduct is excepted), something that is currently not possible.

Accordingly, while the new Act restricts the extent of the risk which may, in principle, be insured against by a company in protecting itself against acts of default by its directors, it simultaneously expands the scope of those who may enjoy protection under such insurance.

Francis Newham, Director and Yaniv Kleitman, Associate
Corporate and Commercial

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