Law & Regulation
Managing Liability
By Mark Adams, Arachas
Jun 16, 2009 - 10:15:13 AM

Management blamed for breach of fiduciary duties following the collapse of a building company Damages sought € 3,000,000

One company director sued another company Director on failure to deliver on agreed action € 200,000

A barman was sacked after being questioned over the disappearance of some money. He sued for wrongful dismissal and was awarded €35,000 because the company directors involved did not follow proper disciplinary procedures.

Binman nicknamed “Excuse Me “ awarded € 20,000 by tribunal

Woman sales rep called the “the weakest link” by boss awarded € 35,000

Five different cases from a very long list, they all have one thing in common. They involve companies or directors sued for alleged actions or lack of action, resulting in sizeable payments being made to claimants. These cases directly impacted on the company’s balance sheet. And affected the company’s financial exposure and profitability, affecting the viability of future trading of the company.

Being a director or officer of a company, has always involved onerous responsibilities but the ever-increasing regulation means that those responsibilities are becoming ever more far-reaching. Directors and officers are personally liable for any action taken against them and there are instances where individual directors have suffered severe reductions in their lifestyle and livelihood as a result of being sued. Directors should be fully aware that any action taken against them puts their own personal assets in jeopardy when defending a claim. They are personally liable when the company either cannot or will not indemnify them against a claim. Also, boards of governors, members of committees, charitable trustees or voluntary groups have a similar exposure. In fact members of charitable boards and committees may have a higher exposure as their position maybe in a part time capacity and therefore the time required to keep “up to speed” with the changing legislation may not be available. The new Charities Act will increase the exposure of Directors of charitable organizations

Virtually any decision can lead to an action or a lawsuit – whether the action comes from employees, creditors, contractors, competitors, shareholders, not to mention the plethora of State regulatory agencies such as the ODCE, the Equality Board, Health and Safety Authority and the Pensions Board.

Readers will be aware that one of the specific initiatives of recent times in the Company Law area was the Directors Compliance Statement, which formed part of the Companies (Auditing and Accounting) Act, 2003. Directors of companies that fall within the scope of the modified Directors’ Compliance Statement will be obliged to make a statement:

(a) Acknowledge that they are responsible for securing the company's compliance with its relevant obligations

(b) Confirm the company has in place a compliance policy statement that is, in the opinion of the directors, appropriate for the company; and, if this is not the case, specifying the reasons.

(c) Confirm that the company has in place, appropriate arrangements or structures that are, in the opinion of the directors, designed to secure material compliance with its relevant obligations, which arrangements or structures may (at the discretion of the directors) include the company's reliance upon internal and or external advisors who appear to the directors to have the requisite knowledge and experience to advise the company on compliance with its relevant obligations; and, if this is not the case, specifying the reasons.

(d) Confirming that the company's arrangements or structures referred to in paragraph (c), have been reviewed during the financial year to which the report relates, and, if this is not the case, specifying the reasons.

Where the directors of a company to which this section applies fail to comply each director to whom the failure is attributable is guilty of an offence.

In addition the responsibilities surrounding employment practice and employment law create their own exposures for both the director and the company. Even a cursory glance at the newspapers shows that the number of employment-related claims against companies is soaring and any organization, no matter what their size – runs the risk of being sued over issues ranging from redundancy, dismissal, discrimination, harassment claims and a whole range of equality issues.  The cost of settling these claims is increasing and there is a clear perception that employment legislation is more likely to be interpreted in favor of the employee.

Employees have a greater awareness of their rights while immigration has resulted in an increase in discrimination claims. Smaller employers probably have less grasp of the range of State agencies where claims might be taken against them – ranging from the Employment Appeals Tribunal, The Equality Board, Equality Tribunal, Health & Safety Authority or the courts.

The attitude of “It won’t happen to me” is far too prevalent with SME’s and as the volume of legislation increases it is the SME – with limited resources – that is in much greater risk than the large corporate with its battery of advisers.

No responsible company would continue to trade without Employers and Public Liability insurance as well as adequate Fire and Business protection, however trading without Directors and Officers and Employment Practice Liability insurance leaves a potential exposure to the balance sheet and the continued viability of the company and its personnel. This exposure can be transferred in the form of Directors and Officers and Employment Practice Liability Insurance. It should be remembered the policies will not provide cover for criminal fines and penalties and it is therefore still the responsibility of each individual director and officer to ensure the company is compliant with its requirements.

Given the potential costs of claims and the increase in compensation culture, and the relatively cheap premiums available for this cover (premiums start at €700) SME’s might be well advised to consider Directors and Officers and Employment Practices Liability. Similarly, larger companies who already buy this cover should ensure the policy is a bespoke insurance policy specifically designed for their requirements rather than an “off the shelf” policy.

Arachas employs over 100 people between their offices in the Cork, Dublin Limerick Waterford and Wexford and provide a wide range of insurance covers including Professional Indemnity, Directors Liability, Employment Practice and Pension Trustee Liability. For more information please contact Mark Adams at Martin.adams@arachas.ie

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