Concerned About Financial Decisions? Can Directors Get Indemnity Without Resigning?

I am a director and cheque signing authority of a private limited company, but I am not involved in day-to-day management. I am not happy with the financial management of the company, which is being handled by one of the co-signatories making independent decisions. I do not want to resign as a signatory at this moment as there is a dispute in the company, and if I resign, it will completely destabilize the company. Can I obtain a financial release indemnity from the other co-signatory, and is such a release valid? Is there a specific format for this request?

Understanding Director Liability in Sri Lanka and India

I do not know what law applies in Sri Lanka. You need to refer to your company act, income tax act, and related laws to determine what the requirements are.

In Indian law, all directors are jointly and severally liable for unpaid taxes and other statutory dues for the period the person is a director. The liability persists even after resignation, but only for the period prior to resignation.

In case of fraudulent transactions, the law holds all directors responsible and liable unless the director was not involved in the business and did not represent himself as representing the company.

For any bounced cheque, the director would be liable as an authorized signatory or as the person signing the cheques.

Universally, the laws are designed to hold that if the director signs cheques, he cannot claim to be not involved in the business. Furthermore, any release or indemnity is only internal and does not operate as a shield against a third party. This means that you can counter-sue the company to reimburse you for the loss or payment, but you cannot tell an outsider that you have indemnity so he shouldn't sue you.

You better speak to a local lawyer familiar with the corporate law of your country to understand your rights.

This seems to be a reasonable analysis applicable to you. Please read and understand the same (I got it from a Google search).

http://www.kdu.ac.lk/proceedings/irc...15/law-014.pdf

In addition to the observation of Shri Saraswat Banerjee, I may point out that company laws are almost identical in every country, laying equal responsibilities on the Directors of the company who work on behalf of the company. The company is declared as an artificial person and a separate legal entity. Therefore, all directors are jointly, equally, and severally responsible for any transactions made for the company. According to any company law, no immunity can be granted to any director from any responsibility.

Furthermore, a cheque signing authority is not merely a nominal signatory of the cheque to fill in the blank. The purpose behind opening a joint account and having more than one signatory is to ensure that no illegitimate or illegal transactions are made for the company. Each signatory must play a role in cross-checking with approvals, invoices, vouchers, and other supporting documents to ensure that the company's funds are being used legitimately and in its best interest. This process also aims to prevent any fraudulent withdrawals or unapproved and undesirable expenditures.

Therefore, according to the legal position, no immunity is granted to any cheque signing authority. Consequently, there is no scope to obtain a financial release indemnity from the other cosignatory. Any such release, even if made, would be invalid in law.

Legal Responsibility of Directors

I see our poster has not even logged in to see the replies that have come in. However, let me add another point I just discussed with a lawyer.

Under torts and common law, if there is a case or allegation against a director on account of his being a member of the board of the company, for an action or failure of the company (not for failure of his personal responsibility), the company is supposed to defend the case in court and pay the cost of the case. So, the release that the poster wanted is already there in law. That is, in case the director is sued, the company is required to pay or reimburse.

Responsibilities of a Director

As a director, you are responsible for how the company operates, the decisions it makes, statutory dues and taxes, and any financial irregularities, such as cheque bouncing. Being a signatory ensures that you cannot claim ignorance of the decisions made. If you disagree with any decision, you should refuse to sign the cheque.

Liability and Financial Release

No financial release works against a third party. You will still be liable in court or any proceeding. At best, it's an internal arrangement stating you will be reimbursed in case any personal penalty is imposed.

Is there a format for such a release, at least for internal arrangement and for reimbursing against personal liability? I would greatly appreciate it if it is available.

Agreement for Indemnity and Liability Protection

There is no specific format for this. You can make an agreement stating the circumstances in which the company will reimburse you for the cost of any liability imposed on you by a court or government authority. However, we come to the second part of the problem: with whom will you sign the agreement? You cannot sign it with the company itself. As a director, the company’s actions are mostly under your direction. Any such agreement would be to protect yourself against actions taken or allowed by you, making it unenforceable in court.

You can sign it with the other shareholders and directors, ensuring that they will guarantee your reimbursement and protection. This agreement would take the form of a shareholder agreement. A better option might be to consider taking out Director & Key Manager Liability insurance coverage.

Customized agreements should be preferred to serve your purpose. Otherwise, there is no way to legally shun your responsibility.