THOUGHT LEADERSHIP

Civil liabilities of a director and why every investor needs a D & O insurance policy

The role of directors in a company is to provide leadership, guidance, and oversight to ensure that the company is being run in a responsible and ethical manner, and that its goals and objectives are being achieved. The directors play a crucial role in ensuring that a company operates in the best interests of its stakeholders, which can include investors, shareholders, employees, customers, suppliers, among others. It is imperative as this will help ensure long-term sustainability and success of the business, while also building a positive reputation and reducing legal and reputational risks. In India, a director of a company can be held liable under various civil laws. Some of the civil liabilities of a director in India are:

  • Breach of duty: A director can be held liable for any breach of duty that they owe to the company or its shareholders. Directors have a fiduciary duty to act in the best interests of the company, and any breach of this duty can result in civil liability.
  • Mismanagement: If a director is found to have acted in a negligent or reckless manner, resulting in mismanagement of the company’s affairs, they can be held liable for any losses suffered by the company or its shareholders.
  • Insider trading: If a director engages in insider trading by buying or selling securities based on non-public information, they can be held liable for any losses suffered by investors who traded in reliance on that information.
  • Oppression and mismanagement: If a director is found to have oppressed minority shareholders or mismanaged the affairs of the company, they can be held liable under the Companies Act, 2013.
  • Breach of contract: A director can be held liable for breach of contract if they fail to fulfill their obligations under a contract entered into with the company or its stakeholders.

It is important to note that the liability of a director can extend to personal assets in some cases. Therefore, it is important for directors to exercise due diligence and act in the best interests of the company and its stakeholders.
While directors and officers (“D&O”) insurance is not mandatory for every company, it is highly recommended that investors purchase this type of insurance policy to protect themselves from financial risks. Directors and officers insurance is a type of liability insurance that protects directors and officers of a company from legal actions that arise from the decisions and actions they make while performing their duties. Here are some reasons why every investor needs a D&O insurance policy:

  • Protection against personal liability: A company’s directors and officers are subject to personal liability for any mistakes, blunders, or omissions they make while carrying out their obligations. This may result in exorbitant legal bills, settlements, or verdicts, all of which might have a crippling financial impact on the person. D&O insurance offers protection from these kinds of lawsuits and can aid in safeguarding the private assets of directors and officers.
  • Attracting and retaining talent: Investors can recruit and keep great personnel if they provide D&O insurance to their directors and officers. D&O insurance demonstrates the organization’s dedication to safeguarding its executives and might provide potential new hires and employees a sense of confidence.
  • Increased confidence from stakeholders: Investors who have D&O insurance in place can give stakeholders, including shareholders, customers, and vendors, confidence that the company is financially protected. This can help strengthen the company’s reputation and mitigate the risks associated with legal claims.
  • Protection against unforeseen risks: D&O insurance can provide coverage against unforeseen risks, such as cyberattacks or lawsuits stemming from regulatory non-compliance. These types of risks can be difficult to predict, and having insurance in place can help investors prepare for the unexpected.

In summary, D&O insurance can provide valuable protection for investors against legal actions and personal liability, while also helping to attract and retain talent, increase stakeholder confidence, and prepare for unexpected risks. It is an important consideration for any investor who wants to safeguard their financial and reputational interests. Every investor should consider purchasing a D&O insurance policy to protect themselves from personal liability, attract and retain top talent, increase stakeholder confidence, and prepare for unforeseen risks.

Disclaimer

As per the rules of the Bar Council of India, law firms are not permitted to solicit work and advertise.

By clicking the “Agree” button and accessing the website www.burgeon.co.in, the visitor fully understands and accepts that the contents herein are solely for informational purposes and should not be interpreted as solicitation or advertisement. The firm is not liable, in any manner, for the consequences of any action taken by a visitor relying on materials/ information provided on the website. The firm urges visitors to seek independent legal advice for any legal issues.