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Director's Indemnity: Update

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

1/12/2016

By Law Central Legal

As a director of a company, you may be at personal risk for decisions made in the best interests of the company unless your company indemnifies you. A director’s indemnity involves a company undertaking to protect its directors against liabilities that they may incur in the course of performing their company duties. A director’s indemnity may be required (as in some instances by ASIC) or a company can choose to indemnify their directors.

Whether your company is a small business or an entrepreneurial juggernaut - a director’s indemnity is vital. A director’s indemnity protects corporate directors in the event they are personally sued. Contrary to popular belief, a company does not need to have an action launched by its shareholders for its directors to be made personally liable. Often when a company is sued, directors are brought into legal proceedings by investors, employees, vendors, competitors and customers just to name a few.

In addition to director’s indemnity, a company can choose to take up directors and officers insurance (D & O insurance). This will depend on the activities your company carries out and the nature of your business. Law Central offers 2 types of Director’s Indemnity Agreements. The Director's Indemnity Agreement - No Insurance document for when no D & O Insurance is taken, and the Director's Indemnity Agreement - Compulsory Insurance document for circumstances where the company agrees to hold D & O insurance.

To insure or not to insure?
Law Central’s Director’s Indemnity Agreements offer protection to directors for up to 7 years after they resign from office. This ensures that company directors are protected from actions brought within the limitation period and any tax audits that may be conducted. However, there are some limitations of a director’s indemnity that may warrant additional cover.

Director’s indemnity will only go so far…
Directors and officers may be personally liable for breaching the Corporations Act 2001 (Cth) (Corporations Act) or the Competition and Consumer Act 2010 (Cth) (CCA). Under section 229 of Schedule 2 of the CCA, a company is not allowed to indemnify directors and officers against liability for these breaches or against legal defence costs if such liability is established. Any attempt to indemnify these personal liabilities will be declared void under section 230 of Schedule 2 of the CCA.

However, companies are not prohibited by the CCA or the Corporations Act from arranging D & O insurance for directors and officers. Depending on the insurance policy, directors and officers can be covered against liabilities for these breaches and the associated legal defence costs. As well as protecting corporate directors and officers, D & O insurance may offer added security to future investors.

It is important to remember that a company’s undertaking to indemnify a director will only be of use where there are company funds in place to meet the liabilities incurred. Where a company faces insolvency, D & O insurance provides a stronger guarantee that liabilities will be met. D & O insurance also provides security to employees and people looking to invest in the company.

Section 199A of the Corporations Act covers situations where an indemnity for a liability is not allowed. Sub section (2) states, amongst other things, that a company must not indemnify a person against any of the following liabilities incurred as an officer or auditor of the company - “(a) a liability owed to the company or a related body corporate”.

Section 199A(3) covers situations where an indemnity for legal costs are not allowed. In particular under sub section (b) a company must not indemnify a person against legal costs incurred in defending an action for a liability incurred as an officer or auditor of the company if the costs are incurred “in defending or resisting criminal proceedings in which the person is found guilty”. The Court of Appeal of the Supreme Court of Victoria in the case of Note Printing Australia Ltd v Leckenby [2015] VSCA 105 considered the application of this section of the Corporations Act. Gold and Platinum members read on for a summary of this case.

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Final Considerations
It should be a very wary director that operates without any form of indemnification from their company. If your company has chosen to indemnify or insure its directors and officers, make sure it is done correctly. Law Central’s Director’s Indemnity Agreements are a clear and simple way of ensuring that the director is properly protected.

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central Legal recommends you seek professional advice before taking any action based on the content of this Bulletin.

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