Civil Liability Insurance Contracts for Directors under Portuguese Companies Code

 

 

In this Expert Commentary, authors Luisa Soares da Silva, Joana Pereira Dias and Joana Galvao Teles identify and analyze the main types of civil liability insurance contracts for directors their scope, terms and limits under article 396 of the Portuguese Companies Code, as amended by the deep reform on the corporate governance rules and models introduced by Decree-Law 76-A/2006, of 29 March (hereinafter PCC). In doing so, we include: (1) an explanation of the reasoning behind the amendments to article 396 introduced by the abovementioned reform; (2) a brief reference, instrumental to the main question on the civil liability rules applicable in the case of damage caused by directors in the exercise of their functions; and, consequently (3) the identification of the two main types of civil liability insurance contracts which, in accordance with Portuguese Law, allow the insurance against risks associated with the functions of directors and the analysis of the advantages and disadvantages of the contracts.
 
The authors write:  The main concern which led to the introduction and to the amendment in 2006 of article 396 of the PCC was and still is to set out and maintain an equilibrium between, on one hand, the significant growth of companies and of the liability of their directors which, according to Portuguese Law, must be duly covered but for a reasonable amount and, on the other hand, the right of the shareholders to have a sufficient and adequate guarantee that they will be compensated for possible damage caused by the directors of the company.

With the legal reform of the PCC in 2006, the main amendments to article 396 were the increased amount of the suretyship mandatorily imposed (presently, fixed at 250,000 for large companies and 50,000 for all other companies), the creation of a specific legal scheme for the companies issuing securities which are admitted to trading on a regulated market and for large companies that fulfil some criteria regarding total balance sheet, total net sales and number of workers foreseen in § a) of number 2 of article 413 of the PCC, in opposition to small and/or medium companies which are not subject to these specific rules and, last but not least, the enlargement of the possible beneficiaries of the insurance policy.

Number 2 of article 396 was modified in accordance with the general civil liability rules applicable to directors of a company in order to state that the beneficiaries of such insurance policy will be everyone entitled to compensation and not just the company. In fact, although the civil liability rules have not been interpreted in a unanimous way among Portuguese authors and in the case law, there are three main types of cases of directors liability. Firstly, they are liable to the company for damage caused by acts or omissions resulting from their legal or contractual duties, unless they prove that they did not act negligently or wilfully, with certain exclusions of liability, including the introduction in 2006 of the business judgment rule principle referred to below (articles 72 and 73 of the PCC); secondly, they are liable to the creditors of the company if they negligently or wilfully ignore the provisions set forth by law or in the articles of association designed to protect the company’s assets and the creditors and the assets become insufficient to satisfy the company’s credits (article 78 of the PCC) and thirdly, they are liable to the shareholders and third parties for damages which result directly from the fulfillment of their duties (article 79 of the PCC).