If you are a director or a senior official with a company, make sure that the company has taken a D&O Liability Insurance and you are covered under the same. A personal liability arising on account of any failure on your part in carrying out your responsibilities properly or any wrongful act committed by you in your managerial role may catch you unaware and burden you with legal expenses and sizable financial liability to be paid to the aggrieved party.
If that was something which in any case was necessary to secure yourself from any contingency of that sort, the new Companies Act that was recently approved by the Parliament makes it even more essential for companies and their employees to secure against such claims.
The Companies Act clearly lays down the duties and responsibilities of directors and senior officers and thereby holds them accountable directly for the same. It also proposes to set up a National Companies Law Tribunal (NCLT) where the aggrieved party can file their cases against the individual and seek compensation for damages. The NCLT would look into early resolution of all issues relating to mismanagement and other company-related matters.
“Since the new act clearly defines your role and expectations, you will be held accountable for any lapse on your part as you are enshrined with that task. Also with the advent of NCLT, the phase of cases being stretched for several years in civil courts will no longer be there and cases will be resolved quickly by the NCLT and financial liability may fall upon you,” said Sushant Sarin, senior vice president, commercial lines, Tata AIG General Insurance.
The Companies Act also provides a provision for class action suit where a person or a group of people, who represent the interest of a larger group, can file a suit before the court since they have common grievance. The provision which was available to investors in the US was not available to Indian investors and which is why Indian investors of erstwhile Satyam Computer Services have not been able to get their due even as the investors in the US have managed to get the same as they filed a class action suit.
These three changes in the Companies Act have made it more important for companies to take cover under the D&O liability which is a kind of insurance that covers liability of senior executives that arises due to a wrongful act of the person in managerial capacity.
If a company takes such an insurance policy then in case there is any court proceeding against a director or a senior official, then all legal expenses are recoverable under the D&O policy and are payable in advance of the final judgement.
The policy also provides protection for claims brought against the directors, officers and employees for breach of duty, neglect, misstatements or errors in their managerial capacity.
Industry insiders say that the queries for the policy have gone up in recent times and over the last few years the growth in the number of policies been taken is over 20 per cent.
While almost 10 general insurance companies, including Tata AIG, ICICI Lombard, New India Assurance offering the product, industry estimate suggests that around 5,000 companies have already taken cover under the policy and over 5,00,000 executives and directors are covered under the same.
The premium being paid by companies for the cover varies form Rs 50,000 to Rs 50 lakh depending upon the size of the company, whether they are listed in India or abroad, whether its an old economy company or a new economy company, its financial performance, among others.
While the new Companies Act ensures protection for investors and other stakeholders of a company, looking to pinpoint responsibilities of directors and officials to hold them accountable for any lapses in the same, top officials and directors may find it prudent to keep themselves protected against any such liability that may arise in future.
*The Companies Act lays down the duties and responsibilities of directors and senior officers and thereby holds them accountable directly for the same. It also proposes to set up a National Companies Law Tribunal where the aggrieved party can file their cases against the individual and seek compensation for damages
* If you are a director or a senior official with a company, make sure that the company has taken a Directors and Officers (D&O) liability insurance and you are covered under the same
*If a company takes such an insurance policy then in case there is any court proceeding against a director or a senior official, then all legal expenses are recoverable under the D&O policy and are payable in advance of the final judgement