Page 23 - RMAI July-September 2018

July - September 2018

interest of the employees in India the Workmen's Imprudent expansion resulting in a loss (xi) Using
Compensation Act now changed as Employees inside information (xii) Unwarranted dividend
Compensation Act, 2011 requires most employers to payment, salaries or compensation (xiii) Misleading
compensate employees to medical expenses and loss statements filed with the Stock exchange (xiv)
of income due to injuries or certain diseases arising Misrepresentation in acquisition agreement for the
from their employment. The family of an employee purchase of another Company (xv) Wrongful
who dies as a result of job oriented accident or dismissal of an employee.
disease also collects a specified amount.
KEY-PERSON LOSSES :
Directors and Officers Liability :
The most valuable asset of any organization is their
The Corporate decisions that yesterday did not people – especially those key persons whose skills,
materially affect other people today powerfully knowledge or special qualities are not easily replaced.
impinge on their lives and the subject matter has a Loss of the services of a key person – through death,
direct bearing on the potential liabilities of Corporate disabling injury, disease or resignation can cause
Directors' and Officers' today. The increase in severe losses to the firm. Identifying and analyzing
litigation against directors reflects a change in the this key-person exposures requires distinguishing
attitude of the general public towards greater between persons who are key because they are :
management accountability and hence the position I. Employees possessing special talents, and
of a Director is becoming far more onerous. Actions
are most likely to be commended in relation to: (i) II. Owners whose absence would threaten the firm's
Actual or alleged breach of trust (ii) Breach of duty or survival.
warranty of authority (iii) Neglect or Omission (iv) The loss of the services of a key-person can result in
Error or misstatement or misleading statement (v) major financial problems for a firm. The profits which
Failure to supervise or regulate properly. he had been generating would be lost until a

Who might bring an Action? (i) Shareholders: alleging replacement could be found and trained to produce
financial loss attributable to failure by Directors or the same level. Further, the firm would have to incur
Officers responsible (ii) Employees: alleging unfair extra expenses to find and recruit a replacement and
dismissal, discrimination, sexual harassment or to reassign duties temporarily among other
employees until this replacement became fully
mismanagement of pension funds (iii) Customers:
productive.
alleging that they have suffered financial loss
following wrongful advice on the application or Indeed the loss of a key-person may even threaten the
suitability of product (iv) Competitors: alleging that survival of the firm. The heirs or other successors of a
their businesses have been adversely affected by a key-person may not be able to contribute to the
restrictive trade practice e.g.: price fixing (v) success of the business in the same way.
Members of the Public: failure to effect and maintain POSSIBLE WAYS OF MEETING VARIOUS BUSINESS
adequate control or services. (vi) Regulatory Bodies: RISKS :
for offences under the Companies Ordinance or Avoiding Loss Exposures :
breaches in similar legislation.
The first devise that strikes the mind immediately is to
Potential Allegations: The following list provides avoid those risks which are avoidable. The essence of
typical examples of "wrongful acts" which could be risk avoidance is to refrain from undertaking or to
alleged against a Director or Officer - though, this is abandon an extra hazardous project, thus,
not an exhaustive list: (i) Inaccurate statements of completely removing the possibility of loss arising
financial conditions (ii) Errors in annual accounts (iii) from that project. A prudent business person avoids
Conflict of interest (iv) Lack of judgment, diligence or activities which are too hazardous, such as
good faith (v) Mismanagement of funds (vi) establishment of a store on the banks of a river which
Misstatements in prospectuses (vii) Allotment of floods regularly, or selling a product which is likely to
shares (viii) Unauthorized or imprudent loans or injure customers, or using delivery vans which have
investments (ix) Failure to obtain competitive bids (x) known mechanically defects.

22 RISK MANAGEMENT ASSOCIATION OF INDIA