The Continuity of Personal Liability
A director’s liability for a statutory contravention, a breach of fiduciary duty, or a fraudulent act is personal. The transfer of the undertaking to the transferee does not shift that liability to the transferee or extinguish it. The transferor’s directors remain liable for their conduct during their tenure, and the scheme cannot grant them a blanket immunity.
The Scheme’s Indemnity Clause
Some schemes include an indemnity from the transferee to the transferor’s directors for liabilities relating to the transferred undertaking. Such an indemnity is enforceable between the parties, but it does not bind the regulator or a third-party claimant. The ROC, the SFIO, or a creditor can still proceed against the director, and the director’s remedy is to seek indemnity from the transferee.
The Successor Liability
The transferee may inherit the transferor’s liabilities as a successor, but that does not make the transferee’s directors liable for the transferor’s prior acts. The transferee’s directors are liable for their own conduct after the effective date, not for the transferor’s historical defaults. The scheme should distinguish between the transferor’s liabilities (which vest in the transferee) and the transferor’s directors’ personal liabilities (which remain with the directors).
The Practical Protection
The transferor’s directors should obtain a legal opinion on their continuing exposure and should ensure that the scheme’s indemnity clause is backed by the transferee’s covenant and, where possible, security. The indemnity should cover the costs of defending proceedings, not merely the damages.
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