How to protect your company directors from litigation
The economic uncertainty brought about by the COVID-19 pandemic has already seen many well-known businesses close their doors due to insolvency. Unfortunately, these businesses often leave a flood of debt in their wake with litigators and creditors lining up to be paid.
Whilst it’s important to ensure that all employees are protected during these difficult times, company directors must also address their own level of protection. That’s because when a business goes into insolvency, the personal and family assets of the company’s directors can be accessed during the liquidation process. This can lead to significant financial stress and bankruptcy for unprotected company directors.
There are two main avenues for protecting the assets of company directors, senior staff and business owners, as follows.
1. Legal protection for company directors
Directors can be found personally responsible for their company’s debts and liabilities if they are found to have acted unlawfully. These breaches can include trading while insolvent, personally guaranteeing a company loan, and fraudulent trading. However, if the insolvency is not due to any wrongdoing on behalf of the directors, but to loss of revenue (as occurred recently due to the pandemic), their assets can still be accessed to pay debts.
Unless of course, the company directors have protected their assets against such an eventuality. Asset protection for directors should be considered a key component of their salary package, ensuring that the family home for example, is not threatened during the insolvency process. Some avenues that can be utilised by company directors to protect their assets include holding all assets in a trust or a self-managed superannuation fund. Other strategies include transferring assets into their spouse’s name, establishing testamentary trusts as part of estate planning, and death benefit nominations for superannuation payouts. Company directors should ensure they take professional advice when considering any of these strategies.
2. Insurance protection for company directors
Directors and Officers Liability Insurance is designed to protect the assets of senior management in large multi-nationals, but it’s also applicable to SMEs. It’s designed specifically for business owners and managers or directors who run companies, because they are personally responsible for their decisions and actions within the business. In cases of insolvency, they can protect the assets of senior management against liquidators, if they have behaved appropriately and not abused their director’s duties.
This type of insurance can also protect senior management against unproven criminal charges that require a court defence, as well as lawyers and investigators. Legal costs for both past and present officers, as well as compensation or penalties that may result from a claim can all be covered under this type of insurance. Apart from liabilities and debts due to insolvency, other claims that can be covered include breach of contract, overstepping of director’s authority, legal non-compliance, misrepresentation, and so on. With many decisions made frequently every day by senior officers of a company, suitable insurance protection is vital.
Whilst SMEs can cover their senior staff with a Directors & Officers Liability Insurance, they also have the option of Management Liability Insurance, as this is designed specifically for smaller businesses. To decide what type of insurance policies are suitable to protect your senior staff, talk to an insurance specialist today and contact Lisa Carter, Clear Insurance.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Lisa Carter.