As the director of a company, it is important that you minimise the risks you are exposed to. A great way to protect yourself if anything goes wrong is a deed of indemnity. This Legal Kitz article will inform you of all you need to know about a deed of indemnity.
What is the role of a company director?
The role of a company director is complex with many legal duties and responsibilities. These duties are specified under the Corporations Act 2001 (Cth) and include obligations such as:
- Acting in good faith and for a proper purpose;
- Acting with reasonable care and diligence;
- Preventing insolvent trading;
- Avoiding conflicts of interest;
- Preventing an improper use of positions; and
- Avoiding any misuse of information.
A director is personally responsible for any breaches of their legal duties and obligations that can evoke legal penalties such as fines, bans and escalating legal costs. To give you a few examples, this could leave you personally liable for a debt you provided as a guarantee, debts resulting from insolvency or a failure to pay relevant employee guarantee charges when you were in a director’s position. Not only will you have to personally amend these penalties, but you could also risk receiving a civil or criminal penalty or being investigated by the Australian Securities and Investments Commission (ASIC).
What is a deed of indemnity?
A deed of indemnity is a legal, contractual agreement between a director and a company that can provide a number of safeguards against the personal risks and costs that a company director can face. A deed of indemnity will effectively appoint your company to cover costs that result from many breaches and may include other protections such as insurance, duty finances and access to documents. It affords protection and reduces personal liability.
Whilst having a deed of indemnity is not an essential requirement, this agreement is highly recommended. Companies will often include indemnity clauses in their constitutions but many only provide this protection in limited circumstances. It is much preferred that a director enters into a separate deed of indemnity to ensure that they are protected for a wider range of circumstances including costs incurred as a director and costs from any breaches.
Relying on a company constitution with an indemnity clause only applies throughout your role as a director but will cease when your role changes or if you leave the company. Not to mention, a constitution could be amended and changed without your consent. Note that any costs incurred from your actions could then deem you financially responsible. These changes in application will vary depending on the scope of the agreement you choose to set up or enter.
Are there limitations with a deed of indemnity?
A deed of indemnity does possess some limitations. The Corporations Act 2001 (Cth) identifies many instances where a company director cannot be indemnified. To give you a few examples, these circumstances can include:
- Criminal behaviour;
- Fraudulent behaviour;
- Dishonest behaviour;
- Liabilities that you already owe to the company;
- Liability for specific pecuniary penalty or compensation orders;
- Breaching your specific director duties; and
- Breaching any other statutory obligations under The Corporations Act 2001 (Cth).
What are the essential elements of a deed of indemnity?
Every deed should be tailored to suit the nature of a company, but all deeds of indemnity should aim to cover the following:
As with all important agreements, a deed should not be unambiguous. A deed of indemnity includes many terms which should have clear, express definitions including liability, claim, company, indemnify and other recurring terms.
The coverage of the deed should be clearly written. Ideally for a director, the deed would provide unlimited coverage so it continues to apply when you are no longer in your director role. A greater scope can be achieved by creating a deed separate from a company constitution.
3. Indemnity clause
The indemnity clause should provide the limit to which the company will be required to cover your legal responsibilities. A commonly used phrase may say that the company indemnifies the director to ‘the maximum extent permitted by law.’ This acknowledges the exclusions of fraudulent, dishonest or criminal behaviour aforementioned. However, it is best practice to include all these circumstances where a deed will not reduce liability clearly rather than assuming it is implied.
4. Access to documents
Directors will usually have a legal right to access company documents in permitted circumstances. A deed of indemnity can ensure that this access is granted in a broader range of necessary situations. This will allow a director to access documents if a court proceeding arises from your obligations or breach. These documents may include:
- Board papers;
- Meeting agendas;
- Financial statements; and
- Asset registers.
5. D&O insurance
Director and officer insurance (D&O Insurance) is a type of insurance separate from other company insurances. A deed of indemnity can legally enforce the company to hold this type of insurance and meet minimum requirements regarding this insurance. This commonly arises from a clause stating that the company should:
- Maintain the director and officer insurance for the time the director holds officer at lease seven years following;
- Pay the insurance premium; and
- Provide proof of such policies to the director.
The deed should always cover the insurance scope, terms and conditions. This may provide additional protection against liabilities that aren’t mentioned in the deed.
6. Execution clause
This is the clause which enacts the deed found at the end of the document. It requires the parties, director and representative of the company, to sign the deed making it legally binding.
To ensure a company covers most costs and mitigates how liable you can be as a director for any breaches or for performing typical obligations, it is imperative that you complete a deed of indemnity. This special commercial agreement can be technical but can create substantive protections. That being said, they create ongoing implications and possess risks as well.
Proper advice regarding this document and the specific terms included should be a high priority for company directors. Being able to understand your liability through a deed of indemnity provides comforting clarification and is a great incentive to work for a particular company. As a company, it is also recommended to seek legal opinions to ensure your deed is tailored to your business circumstances.