Being chosen for the position of director can be a privilege and an honour. That position carries with it a tremendous responsibility towards the wellbeing of a company but it does offer some considerable perks here and there that make your tenure all worth it.
Now, deciding to resign from this position should not be taken lightly but, for most of the time, you can simply do it if you want to. But there is that notion that you might get sued for such or have your personal liabilities follow you post-resignation.
So, can you still be sued even if you are no longer the director?
The answer is yes.
Why is This So?
As a director, you have something called a Fiduciary Duty. What that means is that you are supposed to make decisions or actions that serve the interest of another party which, in this case, is the company. As one of the top positions in the company, you are also expected to be as transparent as possible with all your dealings and must put your personal benefit after the company’s.
Now, resigning from your position as a company would not be considered as a Breach of Fiduciary Duty in normal circumstances.It’s the reasons that gave rise to your decision to resign that may beconsidered as such (more on those later on).
To put it simply, resigning or being compelled to resign is not a guarantee that your liability for the acts you have made or the circumstances you were in as the company director will follow you on to your private life. If you have to answer for your actions, you will.
A Few Scenarios
So, what are some instances when your resignation gets you slapped with a lawsuit? Here are a few of instances:
- Personal and Professional Reasons
If we are to be blunt about it, the company should have no reason to keep you if you don’t want to stay. Many of the reasons why directors resign can be purely benign. Perhaps some other company has offered you another position or you want to spend more time with your family.
These are all perfectly valid reasons, mind you, and the company can let you go under these circumstances. However, that assumes that you yourself made a clean exit ie you left your position with minimal to no controversy and your success doesn’t have to be cleaned up after whatever mess you may have created in your tenure.
If the latter two were true, then you can expect a lawsuit to come your way as a private person. In most cases, you would be personally named in the lawsuit especially if the complaint comes from a third party.
- Your Interests Clash with the Company’s
Nothing can be more disconcerting than top management who disagree with the general strategic direction that the company is taking. Sure, we should expect that everyone in upper management doesn’t have to share the same values and opinions but, after intense discussions, it should be assumed that everyone is pulling in the same direction.
Directors whose stance differs from the company’s are quite lethal to the operations of the business. You might make decisions that are out of sync with the rest of the company or, worse, pre-empt everybody else just to prove that your way of thinking is right.
Depending on what you did, you might open yourself up for a suit especially for breaching your duties as director. And,of course, the existing bad blood that you may have with the rest of the board might sway things against you.
- The Company is in Dire Financial Straits
When a company’s financial performance plummets to the point of bankruptcy, you can expect that a lot of its services and protections will be severely affected. To cut costs, for instances, the company might stop paying for liability insurance coverage which means that a lot of upper management would be needlessly exposed to expensive suits arising from their actions.
Understandably, nobody wants to work under that condition which is why you might consider resigning. Just keep in mind, however, that resigning since you feel that the company is going down financially might land you a lawsuit for, again, breach of your duty. This is quite true if most of the factors that lead to the company performing poorly in finances can be traced back to you.
Either way, it is best not to resign on the first instance that you think that the company might go bankrupt. What would be more effective in insulating you from any personal liability is if you made efforts to keep the company up for a few months before the inevitable occurs.
- Discrepancies and Criminal Liabilities
This is perhaps the trickiest situation you can get yourself into as a director. Supposed that you discovered discrepancies, malpractices, and even immoral things committed by people in the higher ups? Your conscience dictates that you do something about it and, since you’ve got the clout and position as director, you attempt to rectify things.
But what if the problem is too ingrained into the company culture or the actual perpetrators are smart enough to use their position to cover their tracks? Do you think it would be better to resign as director to disassociate yourself from all of this? The answer, actually, is no.
There are cases where directors resigned because of wrongdoings made by the board and the executives. In most cases, these directors will still be included in a suit directed towards the company. You may file a motion to dismiss on the basis of mis-joinder but there is a chance that you would still be summoned as a defendant either as a third party or an unwilling one.
Also, strategically speaking, resigning as a director when you think that the rest of the higher ups are part of a conspiracy is not recommended. Doing so expressly grants dominion to people whose overall strategic direction might be counterproductive to the overall interest of everyone in the company. Also, in some cases, resignation at a critical moment might be seen as a breach of your fiduciary duty as a director.
How to Know If Your Resignation Will Not be Problematic?
If you are seriously considering resignation, ask yourself this question:
“Is the company in a certain situation where the act of resigning might make me liable for breach of fiduciary duty?”
One way to make certain is if you can consider your withdrawal from the company a “noisy” one. Noisy withdrawals are a way of inadvertently calling public attention to the company. This is an effective way of bringing to light the discrepancies in the company but it can be potentially harmful for people below the organisational chart and even investors in the long and short term basis.
If your resignation aims to protest the direction that your company is taking or the wrongdoings that the management has covered up for so long, then it may be worth the risk. However, you should at least show effort in protecting the interest of shareholders in the company. After all, that is one of your primary duties as the company director.
How Can You Insulate Yourself, Then?
Although not resignations are going to go as cleanly as you want them to, there are ways to protect yourself from potential lawsuits arising from your own.
- The Indemnification Agreement
This is simply an agreement that ensures that you, as the resigning director, would be protected from all manner of civil and criminal suits for a considerable period of time after resigning. It also promises legal assistance in instances that you do get slapped with a lawsuit arising from your work as director.
However, there are two problems. One, if somebody else acquires the company, that indemnification agreement is not automatically acknowledged depending on how it was drafted. Next, bankruptcy might prevent the company from fulfilling its obligations stipulated in the agreement.
- The Director’s Liability Insurance
An alternative would be to invest in an insurance policy such as Directors & Officer (D & O) liability insurance policies that are designed to protect current, past, and upcoming directors from any lawsuit or, at the least, cover for all expenses if they ever get slapped with one.
Of course, there are caveats here. Like with the indemnification agreement, these policies are not automatically transferred if the company gets acquired by someone else. Another are the premiums which can range from £130 to £20,000 depending on the coverage, making these policies one of the more expensive insurance products out there. Of course, the coverage is also quite comprehensive, ensuring that you most likely won’t have to spend a single penny out of your pockets to clear your name in court.
Do you think that directors should not be held liable after resigning from their positions? What other reasons do you think that they should? Let us know in the comments below.
