IV. PROTECTION OF DIRECTORS

What else can you do to protect yourself as a director?

Ratification of Acts - The matter of obtaining ratification for the acts of a director have been referred to above.

Indemnification - If a director is held to be liable for some fault, can the company pay him or her back for the fines and expenses? The B.C. Company Act says the company may do so but only in certain circumstances.

The company is not required to indemnify a director although it may do so. The company may only indemnify a director if the director acted honestly and in good faith and in the best interests of the company and in addition, the Supreme Court must approve the indemnity.

This is quite a hard test to meet.

It is permissible to arrange for someone else other than the company (say a major shareholder) to agree to indemnify you if you act as a director of the company. That is merely a contract with someone other than the company and so is not forbidden by the Company Act.

Insurance - Although it does not seem to follow logically, it is permissible for a company to buy insurance for its directors to protect them against any problems, even those for which the company is not allowed to indemnify them.

There are policies of insurance available and they are no longer prohibitively expensive. All directors should investigate this area of protection.

Resignation - As a general rule, it is probably wise for a director to resign if he or she foresees serious problems with the company. The director will still be liable for problems that occurred while he or she was a director (resigning will not cure that) although the director may avoid problems that come later. Note the words "may avoid" since a director has a duty to act in the best interests of the company and this may mean that a director should just resign and forget the matter. There have been cases in the U.S. (but not yet in Canada) where directors discovered serious wrong-doing in the company and resigned without disclosing it. The wrongs continued, the company suffered serious losses as a result so and the directors were held liable for not acting to protect the company's best interests when they had the opportunity to do so.

Trust funds - There have been attempts recently by companies to try to protect their directors by establishing a trust fund to pay costs (like employee wages) that might otherwise have to be paid by the directors themselves. Sometimes this has been successful, sometimes not. The sooner such a trust fund is set up, the more likely it will succeed to protect the directors.