Directors’ and officers’ (D&O) insurance policy in Malaysia – Protecting the captains from the storm

The Covid-19 pandemic has created a lot of uncertainties and businesses are bracing themselves for stormy weather and its ripple impact for the remainder of the year. Coupled with the Movement Control Order imposed by the Malaysian government, many companies are working on their business continuity or business survival plans, which include planning for the worst case scenario of insolvency being a probability not just a possibility.

The heavy responsibilities and legal risks to the directors of businesses will become exacerbated in the coming months, as various parties including vendors, employees, customers, creditors and/or even investors could for various reasons, bring a range of legal claims against the company. These claimants, whether rightly or wrongly, could include the individual directors and officers as well.

Directors and officers of a company have various fiduciary duties and legal obligations to the company, both under the Companies Act 2016 and under common law. For example, they have the fiduciary duty to act in the best interests of the company, duty to disclose any conflict of interest, and must at all times exercise their powers for proper purpose and in good faith, etc. While the doctrine of ‘separate legal entity’ applies as a default, separating the liability of the company from the personal liability of the directors, the office of a director still remains a risky one, which could attract personal liability in various circumstances. This includes the offence of trading while insolvent, which could inadvertently occur in such perilous times.

Directors’ and Officers’ (D&O) insurance (also known as ‘corporate liability insurance’) is a specific type of ‘liability insurance’ which covers and promises a pay out to Directors & Officers, in the event such individuals suffer losses or incur defense costs from a legal suit brought against them for decisions made in their capacity as officers of the company.

Of course, such an insurance policy does not mean that ALL liabilities or decisions by a director can be covered. Under the Companies Act 2016, a company cannot indemnify the directors or officers for claims brought against directors or officers for acts or omissions in their capacity, unless the indemnity falls squarely under the narrow ambits of the Companies Act 2016. Generally speaking, a company cannot indemnify a director from the director’s failure to exercise his powers (i) for proper purpose, (ii) in good faith in the best interest of the company, or (iii) with reasonable care, skill and diligence. That said, section 289 of the Companies Act 2016 allows a company to indemnify a director against liability to any third party (that is, any person other than the company) arising out of any act or omission of that director in his or her capacity as such director.

Therefore, a proper D&O insurance policy may be more useful than any broad indemnity given by the company, to ensure that such coverage can be effected and is permitted under the applicable law, which is something that the insurance company or insurance broker will be better positioned to advise on. If any insurance or indemnity by the company which is not allowed under the law is effected, the director may be personally liable to the company for the cost of effecting the insurance.

In considering D&O insurance, there will typically be a laundry list of possible liabilities that can be covered, including, company employment practices beach, investigation costs, tax liability, environmental violation, bodily injury and property damage defence costs etc.

The directors should also be aware of any exclusions under the policy, as it can affect the coverage the directors are afforded. One common exclusion under D&O insurance is professional service, whereby claims arising from the performance of professional services for others are excluded. Given the current volatile market, insurance providers may begin to insert an insolvency exclusion under a D&O insurance policy. An insolvency exclusion would typically exclude from coverage any claims brought against the insured, arising out of or attributable to the insolvency of the company. For example, in the event that a creditor commences legal action against the company which includes the directors, arising from the company’s inability to pay debts due to its insolvency of the company, the directors will not be covered by the D&O insurance.

As with other insurance policies, any exclusion can leave the policyholder with gaps in coverage. It is crucial for the officers of a company to enquire extensively and assess the covered risks, the limits, and the implications of the various exclusions (even on policy renewals) before agreeing to take on a D&O insurance policy.

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This article was written by Shawn Ho and Ee Lyne Chong.  Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021.  We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds.  Feel free to contact us if you have any queries.

 

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