Bye-Law Indemnities and Waivers for Directors and Officers

David Kessaram and Fiona Bada

August 21, 2023

One of the important features of Bermuda company law (in comparison with onshore jurisdictions) is the extent to which Bermuda companies are permitted by the Companies Act 1981 to give directors and officers protection from personal liability for acts and omissions committed in the conduct of their company’s business. The usual form of such protection (in most jurisdictions) is the purchase of a policy directors’ and officers’ (D&O) insurance. Bermuda law, however, permits a Bermuda company to indemnify its directors (usually by adoption in their service contracts of provisions in the company’s bye-laws) against all liabilities (short of fraud or dishonesty) incurred in the conduct of the company’s business. Additionally, the bye-laws may contain provisions granting directors a waiver by the company and its shareholders of such liabilities. This article discusses a recent decision of the Court of Appeal (Global Distressed Alpha Capital I Limited v Christion Michelsen Herman and Walton Law Eddlestone [2023] CA (Bda) 12 Civ (the “GDACI case”) and explains its significance for Bermuda companies and their directors.

Bye-Law Indemnity – Its Scope

In the GDACI case, the company argued that it was not obliged to indemnify its directors in the particular circumstances of that case; nor was the waiver by the company of its rights of action against the directors effective in protecting them. The case raised issues as to the nature of the liabilities in respect of which the directors sought indemnification and whether the liability was within the scope of the indemnity. The company argued that its obligation to indemnify was limited to third party claims against the directors (referred to in the judgment as “external liabilities"); it was argued that the indemnity did not extend to protect the directors in respect of a liability to the company as well, e.g., for damages for breach of his fiduciary duties to the company; or (as was the actual case) his liability to account for a gain or personal profit to which the director was not entitled (referred to as “disgorgement claims.

Scope: Interpretation or Rule of Law?

The case emphasizes the point that the answer to such questions (as with commercial contracts generally) depends on the true meaning and effect of the terms of the indemnity which is to be construed in the context of the contract as a whole. In GDACI it was held that, when read with other provisions of the bye-laws, the indemnity only covered external liabilities. Any liability to the company was outside its scope. Therefore, if the company brought a claim against the director, the director could not plead the bye-law indemnity as a complete answer to the claim.

The GDACI case also touched upon the question (without deciding the issue) whether it is possible for a company by its bye-laws to provide a waiver or indemnity in respect of a claim by a company against its directors where the conduct complained of consists of a misapplication of the property of the company for the personal benefit of the directors or their associates. Is it merely a question of construction of the contract as to whether such a waiver/indemnity exists; or is there a rule of law that disallows reliance on such a waiver/indemnity? Although the question was not posed in such terms, the Court of Appeal expressed the view that it would be surprising if a widely-drafted indemnity would allow a director to plead such a defence to an action to recover the property or obtain compensation for the company’s loss.

Indemnification: conduct in the line of duty?

It was not necessary to answer this question since the bye-law in question was cast in terms that only covered liabilities incurred by a director in the conduct of the company’s business or in the discharge of his duties. Misapplication of the company’s property was not within this description and would not, therefore, provide any protection. It is an open question whether, in the absence of express language (making it clear that only acts in the course of the conduct of the company’s business will be indemnified), such a term would be implied. 

Overview

Although there are similarities in the wording of bye-law indemnities, there are subtle differences from company to company which can have a huge effect especially (as the GDACI case shows) when it comes to the question whether a claim by the company is within or outside the scope of the indemnity. In addition, not all bye-laws contain a waiver of rights of action against directors; and, where they do exist, waivers may serve a different function from that of an indemnity and provide an alternative form of protection

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The foregoing is for general information only and not intended to be relied upon for legal advice in any specific or individual situation.