Mustafa Bhamji & Rachael Mario –
Death is inevitable as it is a part of the life cycle. In the business world, owners, directors and shareholders are liable on all aspects of a Company.
Ignorance of the law is not an excuse.
The following example will illustrate the point.
Following the death of the owner of a medium-sized construction firm in Auckland, the management of the family business was transferred to his widow.
She remained a shareholder, while her eldest son took over the management of the company. A few months later, the Company became insolvent and therefore went into liquidation.
A major supplier brought an action against the widow claiming debts at $250,000.
The wife said she was not aware of the financial liability.
The case went to the Court, which held that she was personally liable for the debts.
Fortunately, the Company had ‘Directors and Officers Liability’ insurance cover. There would not have been any indemnity if the court had found that the shareholder or director (in this case the widow) was in ‘deliberate breach of duty.’
Directors’ Liability
Directors and officers have duties and obligations; they are personally responsible and may carry unlimited personal liability.
Such liability can be incurred, not only as a result of their own activities, but also from the activities of fellow directors.
Often, companies indemnify their directors and officers through their constitution.
When indemnifying a director, a company may incur liabilities that have a severe impact on its bottom line. A ‘Directors’ and Officers’ Liability policy will address the concerns and liabilities of both the director and the company when indemnifying the director.
Trustees’ Liability
Trustees of commercial and not-for-profit organisations are also liable under the law.
Failure to discharge their obligations to the required standard can result in the trustees being held personally liable.
In addition, in certain circumstances, liability can be incurred for the activities of fellow trustees. While the Trust may provide indemnity to the trustees for claims made against them, the cost to the Trust in meeting this obligation can in turn provide an undesirable burden on the Trust’s assets.
A Trustees’ policy will address the concerns and liabilities of both the trustee, and the trust when indemnifying the trustee.
An example
A Trust failed to complete the purchase of a number of subdivision lots.
The Trust (through its Trustee) was contracted to purchase 30 lots in a subdivision for over $5.2 million. The Trust purchased only 16 lots.
The vendor cancelled the Agreement, resold the 16 lots and claimed for the losses incurred. In the meantime, the Trust (through its Trustee) disbursed the assets of the Trust to other parties and claimed that it had no assets to pay the amount claimed by the vendor.
The judgment went against the Trustee, who was ordered to pay more than $1 million for failing to complete the purchase of the subdivisions.
The ‘Trustees Liability Policy’ responded due to the Trustee committing a wrongful act that led to creditors and beneficiaries suffering financial loss. If the court had found that the trustee had ‘deliberately committed a wrongful act,’ there would be no indemnity.
Rising litigation
Litigation has gained additional momentum in New Zealand due to the collapse of many finance companies. The striking increase in receivership, liquidation, aggressive competition and deterioration in employment conditions have created huge risks for small and medium enterprises, which either equal or exceed those of large corporates.
Mustafa Bhamji is Senior Risk Advisor at Global Cover Insurance Limited.
The Company’s Director and Registered Financial Adviser Rachael Mario writes:
New migrants and people from lower income groups do not have sufficient insurance cover and hence are more vulnerable to risks arising out of many causes.
A lack of awareness and/or paucity of finance also keep people under insured or out of the insurance sector. Ironically, these people actually need insurance more than anyone else in the society.
Gender discrimination
I interact mainly with women, and they are usually not insured in insurance. More often than not, men have Life insurance cover, while the women in their families are neglected.
The share of women’s contributions do not usually account for the work that they do at home, including raising children.
Such a state of affairs leaves families, particularly dependent children, very vulnerable.
I also noticed that families and business people have poorly thought-out wills, and do not always structure their insurances and asset protection correctly.
We hope to raise awareness of Indian Newslink readers on matters relating to insurance, wills, trusts and other aspects of domestic financial management in the ensuing editions.
