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Contract for limitation of liability of director and auditor ( sekinin gentei keiyaku )

In this page, I will explain contract for limitation of liability ( せきにんげんていけいやく = sekinin gentei keiyaku )of directors and auditors.
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If a person is going to assume non executive director ( Hi gyomu sikko torishimariyaku = 非業務執行取締役 ), she can enter into contract with the company for limitation of liability ( Sekinin gentei keiyaku ).
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To be begin with, what is liability of directors ?

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The relationship between a Stock Company and directors and accounting auditors is based on mandate ( Inin = 委任 ) .
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So, directors and auditors ( = mandatary = Juninsha = 受任者 ) need to take care of their business with  a good manager.

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And they ( directors and auditors ) need to perform their duties for the Stock Company in a loyal manner.
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And moreover they need to Supervise the execution of the duties by other directors.
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If they neglect their duties, they are liable to such Stock Company for damages arising as a result of such negligence.
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If they are with knowledge or grossly negligent ( Jukashitsu = 重過失 ) in performing their duties, they are liable to a third party for damages.

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So, when she assumes director of her friend’s company, she will hesitate to do it.
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In that case, she can reduce her liability by measures below.
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(1) In the case there is more than 2 directors and at least one Auditor, the company can provide that if directors performed their duties without knowledge nor grossly negligent ( Jukashitsu = 重過失),   they are exempted from liability.
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If there is such stipulation in the articles of incorporation, resolution made by majority of directors can such determine such exemption.

( article 426 of company act = 会社法426条)
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(2)  And there is another measure to limit her liability.
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The stock company can provide in the articles of incorporation that the Stock Company may make contract with non executive Directors ( Higyomu sikko torishimariyaku = 非業務執行取締役 ), accounting auditors ( KANSA YAKU ) .

In this contract it is provided that liability of Directors and accounting auditor ( who performed their duties without knowledge nor grossly negligence ) shall be limited to either an amount specified by the Stock Company in advance within the limit of the amount provided for in the articles of incorporation, or the Minimum Liability Amount that is provided by company act ( = SAITEI SEKININ GENDOGAKU =最低責任限度額), whichever is higher.
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Well, I know it is not easy to understand this sentence.
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So, I will explain again.
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1   In the case she is non executive director or auditor and has liability of negligence
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2  At the time of her negligence, she was without knowledge nor grossly negligence aso for her negligence.
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For example….
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She ( One of director, but non executive director ) and other directors of the company decided that the company would lend 100 million yen to XX company without collateral.
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When they made the decision, she did not know financial situation of XX company.
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And the XX company went bankruptcy and it could not repay 100 million yen to her company.
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She did not know XX company would go bankruptcy and for her it was difficult to foresee such bankruptcy.
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In this case, we can say she was without knowledge and grossly negligence.
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3  There is an stipulation in articles of incorporation.
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In this article, it says ” non executive director and auditor can enter into contract with the stock company for limitation of liability of director and auditor “.
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4  Based on this article of incorporation, non executive director and / or auditor enter into contract with the stock company.
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So, if she is executive director, she can not enter into contract with the company pertaining to limitation of liability.
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Executive director is a person who is executive director of the company or executive director of subsidiary of the company or executive officer or manager or employee.
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Before year of 2014, only outside director ( Shagai torishimariyaku ), outside auditor etc can enter into this contract with the company.
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However company act was changed.
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As far as she is not executive director, she can enter into this contract.
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In the case she is executive director, she can supervise daily operation of the company.

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So, limitation of her liability is not possible.
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And even if she can make contract with the company, liability that can be limited is liability based on Article 423 of company act.
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Article 423 :  If a director, accounting advisor, company auditor, executive officer or accounting auditor neglects their duties, they are liable to such Stock Company for damages arose by such negligence.
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So, if her negligence leads to damage to third party, limitation of her liability is not possible.
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And she knew her negligence at the time of her performance, or she has severe negligence and could not know her negligence, limitation of her liability is not possible.
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In order that she enters into contract with the company, the company needs to provide it in articles of incorporation.
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Sample of articles of incorporation

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(  contract for limitation of liability )
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Articles 99
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This company may enter into,  according to article 427 of company act, contract with director ( excluding executive director ) for limitation of liability provide in paragraph 1,  article 423.
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However, limitation of her liability is 1 million yen or the amount provide in company act and which is higher.
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So, if the amount of limitation calculated based on company act is 2 million yen, she needs to pay at least 2 million yen to compensate damages arose in the company.

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In order to provide this sentence in this articles of incorporation, the company needs to change content of articles of incorporation.
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So, resolution of shareholders meeting is required.
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And in the case there is auditor in the company, when the company is going to change content of articles of incorporation, auditor’s consent is required.
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Entering into this contract for limitation of liability of director etc is important matters toward the company.
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So, the company makes this contract, resolution in board of directors is required.
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As for calculation of ” the Minimum Liability Amount provided in company act ( = SAITEI SEKININ GENDOGAKU =最低責任限度額)  “.
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the Minimum Liability Amount = Annual amount of remuneration  + ( retirement remuneration  / duration of office )× 2 + Profit emerged by stock option etc.
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Assumed that she received remuneration of 9 yen in 2015 and 11  yen in 2016.
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She retired her office in 2016 and received retirement remuneration of 9 yen.
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She has been in her office for 3 years.
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She has acquired profit of 50 yen by selling stock option.
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She has negligence in her duty and it caused damage of 100 yen for the company.
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In the articles of incorporation of the company, it is provided that ” limitation of non executive director is 99  yen or the amount provide in company act and which is higher. ”

In that case, the minimum liability amount is

11 yen + 3 yen × 2  + 50 yen = 67 yen.
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99 yen > 67 yen.
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In this case she needs to reimburse 99 yen to the company.
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As for registration process.
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When the company has provided this sentence in the articles of incorporation, the sentence should be registered with legal affairs bureau.
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So, when you look at commercial register of a specific company, you can find out that the company has such article.
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