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Minimising directors’ liability – deeds of insurance, access and indemnity

Company directors have many responsibilities when carrying out their duties.

Generally, company directors and officers are not personally liable for a company’s debts. Certain circumstances however can arise where directors may find themselves facing legal or other regulatory action exposing them to personal liability. Generally, the more complex the role, the greater the risk.

In addition to potential civil proceedings being brought against a company and personally against its directors, regulatory bodies such as the Australian Securities and Investment Commission (ASIC) have the power to personally fine directors for certain breaches of company law.

The threat of personal liability could cause directors to become overly risk averse which may jeopardise potential opportunities for the company’s growth and development. It is therefore appropriate that companies might wish to protect their officers against such liability and that company directors should insist on protection.

 

What is a deed of insurance, access and indemnity?

Liability cannot be completely avoided however directors may minimise personal exposure through a deed of insurance, access and indemnity. This is a contract whereby a company agrees to indemnify its director for liability incurred in his / her capacity as director during the time of office.

Company constitutions may contain indemnification clauses for directors and company officers however, these alone are usually not sufficient nor tailored to provide maximum protection. Further, a constitution may be amended without a director’s consent and any protection afforded generally ceases to bind the company once a director no longer holds office.

In addition to indemnification, the deed should allow directors ongoing access to company records and information and require the company to hold directors’ / officers’ insurance.

Following is an overview of the main components of a deed of insurance, access and indemnity.

 

Indemnification

The level of protection under the deed will be the outcome of negotiations between the company and director and subject to statutory restrictions.

The indemnity should endure beyond resignation / termination of the director’s position. Ideally, it should be unlimited in duration however, at the least, extend to the seventh anniversary after the date a director vacates the position, to allow for expiration of a six-year limitation period for civil claims.

Directors should insist on protection for all personal liability including legal costs arising from any proceedings / claims made against the company and / or the director personally. The indemnification should cover, not only legal proceedings, but the costs of participating in investigations and complying with audits, etc.

Protection should be as broad as possible noting this will be limited by legislation that prohibits a company from indemnifying its officers in certain circumstances, such as:

  • liability (and legal costs) arising from a breach of statutory and common law duties owed to the company such as fraud, dishonest conduct, criminal behaviour or a lack of good faith; and
  • certain specified penalties and compensation orders.

The indemnification provided is usually expressed as ‘indemnification for all liabilities incurred to the maximum extent permitted by law’.

The deed should allow immediate funding to enable a director to respond effectively to a request for compliance or to defend potential or actual legal proceedings. Provisions should also allow the director to exercise some level of control over proceedings, for example, consenting to or rejecting settlement offers and obtaining independent legal advice if a conflict of interest arises.

 

Access to company documents

Access to company records, during and after holding office as a director, is essential to ensure directors can properly answer an audit or defend themselves if they are personally sued.

The Corporations Act 2001 (Cth) provides statutory rights for directors to access company documents and inspect financial records for the purposes of legal proceedings for up to seven years after ceasing to be a director. However, this right is restricted to circumstances where the person requiring access is a party, or prospective party, to legal proceedings. Consequently, a former director may not be able to access material relevant to an ASIC investigation or Australian Taxation Office audit.

The deed should specify the access required and include, but not be limited to, board papers, minutes, agendas, register of members, legal advice or opinions provided during the course of the director’s tenure and all financial records and statements for an indefinite period or at least seven years after ceasing to be a director.

The deed should also make it mandatory for the company to maintain all compulsory financial and other records.

 

Company directors’ / officers’ insurance

For optimum protection the deed should require the company to hold and maintain directors’ and officers’ insurance (known as D&O insurance). The level of protection will be commensurate with the policy document which will generally protect directors for:

  • damages / judgements awarded to claimants in legal proceedings including their own legal costs and, in some circumstances, those of the claimant;
  • fines and penalties raised by regulators such as ASIC;
  • other expenses arising out of the claim.

A claim may include legal action taken by shareholders, employees, regulatory authorities, creditors, competitors and clients, as well as the company itself and other directors of the company.

 

Conclusion

Directors may be exposed to personal liability for losses incurred while directing and managing a company. Such risks however should not prevent a director from appropriately exploiting commercial opportunities and may be mitigated by having in place a deed of indemnity, access and insurance.

Directors negotiating such deeds should obtain independent legal advice to ensure optimum protection appropriate to their personal circumstances.

If you or someone you know wants more information or needs help or advice, please call us on (02) 9274 8820 or email ch@lawbase.com.au.

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