While the company structure generally protects directors from being personally liable to pay company debts, this is not always the case. Directors may be fined by the Australian Securities and Investment Commission or have to pay damages in a lawsuit. However, the company can still protect directors against these liabilities through a deed of access and indemnity. This is a contract between the director and the company. It gives the director access to company records, promises payment of legal costs and mandates having directors and officers insurance. This article outlines what a good deed of access and indemnity will contain.
The Risks of Being a Director
As a director, you have potential personal liability. In certain situations, you can be personally liable for debts of the company, at risk of a civil or criminal penalty of up to $200,000, and could potentially be banned from being a director for a period of time.
Specifically, you could be personally liable for:
- company debts incurred while the company was insolvent;
- failure by the company to withhold the necessary pay as you go tax for employees;
- failure by the company to pay employee superannuation guarantee charges;
- losses to the company caused by a breach of your directors’ duties; and
- any debt you provided a personal guarantee for as a director.
For events that happened while you were a director, you can be sued for six years after you leave office. Therefore, the deed of access and indemnity should have a term that says it continues to apply for at least seven years after you stop being a director.
What a Deed of Access and Indemnity Contains
A deed of access and indemnity covers three key areas:
- access to company books and records;
- indemnity against legal costs and liabilities; and
- directors and officers insurance.
Access to Company Books and Records
The deed should state that the company agrees to give you access to company books and records, including to make copies. You may need these records if you are personally audited or sued.
The deed should specifically set out the books and records you will have access to, including:
- meeting agendas;
- board papers and attachments;
- company financial records and statements; and
- any legal opinions provided to the board while you were a director.
You also want the deed to include that the company agrees to keep the financial and company records required by the Corporations Act. Financial records include:
- financial statements (profit and loss statement, balance sheet and tax returns);
- an asset register;
- cash records (receipts and payments journals, bank account statements and reconciliations); and
- debtors’ and creditors’ ledgers.
Company records include meeting minutes, directors’ consents and registers of members and option holders.
Indemnity Against Legal Costs and Liabilities
An indemnity means that the company promises to pay you for your liabilities and legal costs that arise from being a director of the company. These may include your costs of participating in an investigation or defending yourself if you are sued as a director of the company.
The indemnity should be as broad as possible. For example, “to indemnify all claims arising from any acts or omissions to the maximum extent permitted by law”. You also want the deed to state that the company will pay for legal costs as they arise, not just reimburse you afterwards.
The deed is likely to state that the company can run or take over any case against you as director of the company. To protect yourself, you want to negotiate into the deed that the company’s right to control the case is subject to considering your reputation. For example, if the lawsuit will potentially affect your future career, you will want some control over how you run the case. You also want rights to:
- consent to (or reject) any settlements; and
- engage your own lawyer if there is a conflict of interest between your interests and those of the company.
Directors and Officers Insurance
The deed should state that the company agrees to obtain directors and officers insurance from a reputable insurer. Directors and officers insurance protects directors from liabilities that the company does not mention in the deed of access and indemnity. The scope of the protection will depend on the insurance policies offered by the individual insurers.
To check that your insurance provides adequate cover, you want access to the insurance policy itself and a certificate of currency each year.
Limits on the Deed of Access and Indemnity
The Corporations Act limits the indemnity in two ways. First, the company cannot indemnify you for a liability that you owe to the company. Secondly, the deed of access and indemnity does not protect you if you breach your directors’ duties and other legal obligations under the Corporations Act.
Key directors’ duties include the duties to:
- act in good faith;
- act in the best interests of the company; and
- ensure that the company does not incur debts while it is insolvent.
Directors are also responsible to ensure that the company meets its financial obligations to employees, such as withholding PAYG tax and paying superannuation.
A deed of access and indemnity helps manage your risks as a director, particularly for situations where you acted in good faith but the company still gets investigated or sued. A well-drafted deed should give you access to company records, indemnify you against legal costs and require the company to provide you with directors and officers insurance. It should also provide these protections for at least seven years after you resign as a director.
If you need a deed of access and indemnity drafted or reviewed, call LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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