In Short
- A deed of indemnity is a legal agreement between a company and its directors, ensuring the company covers certain costs and liabilities the directors may incur while performing their duties.
- Key elements of such a deed include clear definitions, the scope of indemnity, provisions for access to company documents, and requirements for maintaining directors’ and officers’ insurance.
- While a deed of indemnity offers significant protection, it has limitations; for instance, it cannot indemnify directors against liabilities owed to the company itself or for actions involving a lack of good faith.
Tips for Businesses
Implementing a deed of indemnity can protect directors from personal liability, fostering confident decision-making. Ensure the deed is comprehensive, covering indemnity, document access, and insurance provisions. Regularly review and update the deed to comply with current laws and reflect any changes in the company’s structure or operations.
Being a company director comes with many legal duties and obligations. If certain situations arise or you breach your duties, you can be personally responsible for any resulting costs. One way to minimise risks is to sign a deed of indemnity with the company when you become a director. A deed of indemnity is a legal agreement between a director and a company. It ensures that you, the director, are not personally responsible for certain liabilities. This article will explain:
- how deeds of indemnity work;
- the types of costs and risks they cover; and
- the essential terms a deed of indemnity should include.
Why Do I Need a Deed of Indemnity?
A deed of indemnity can safeguard you against the personal risks and costs you may face as a company director. A director is personally responsible for any breaches of their legal duties and obligations, such as breaching their duty to:
- prevent the company from insolvent trading (i.e. incurring new debts when the company is already in debt); and
- act in good faith and in the company’s best interests.
Breaches can result in legal penalties such as:
- fines;
- bans; and
- costly legal disputes.
Subject to certain breaches that the law prohibits from being covered, a deed of indemnity means that your company will cover any costs that result from your breaches as director. The deed usually also includes other protections for directors, such as:
- an obligation on the company to obtain directors and officers (D&O) insurance; and
- an obligation on the company to allow the director access to board documents.
The Corporations Act states that a deed of indemnity cannot cover the following liabilities:
- a liability owed to the company or a related corporate body;
- a liability for certain pecuniary penalty orders; and
- a liability the director owes to someone other than the company or a related corporate body that did not arise out of conduct by the person acting in good faith.
Essential Elements of a Deed of Indemnity
Although every deed of indemnity should be tailored to suit the company, they should all include the following essential elements.
Definitions and Scope
The coverage the deed provides should also be clearly set out. The deed should provide extended coverage, so it applies even if you are no longer a director.
Indemnity Clause
The indemnity clause should outline the extent to which the company will indemnify you for liabilities you incur while you are a director. A standard indemnity clause will say the company indemnifies the director to ‘the maximum extent permitted by law’. This means that most clauses will exclude indemnity in certain circumstances, such as for fraudulent, dishonest or criminal behaviour, and for those circumstances that cannot legally be covered by a deed of indemnity.
Document Access
Directors generally have a legal right to access certain types of a company’s documents in certain circumstances. However, a deed of indemnity ensures this access is granted in a wider range of circumstances. Most importantly, it allows you to access certain documents if you need to prepare for any court proceedings.
Insurance
Companies usually hold separate insurance for directors and officers, called D&O insurance. A deed of indemnity can ensure that the company has an obligation to obtain this insurance and that the minimum requirements of the insurance are met by including a clause that requires the company to:
- maintain the D&O insurance for the time the director holds office and at least seven years following;
- pay the insurance premium; and
- provide proof of the policy to the director.
Extra Protections
A deed of indemnity will not help you if the company faces financial difficulties and cannot afford any of the costs you would otherwise be responsible for if the deed of indemnity was not in place. However, if your company is part of a wider group of companies, you could get the parent company or another company to guarantee your company’s indemnity. This will give you additional protection if you face penalties or risks as a director.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
Company directors can be personally responsible in certain circumstances if things go wrong at a company or if they breach any of their legal duties and obligations. However, a deed of indemnity between the director and the company can minimise the risks for the director and ensure that the company covers costs in certain circumstances.
If you have any questions about deeds of indemnity, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
There is generally no obligation for your company to hold D&O insurance. However, under a deed of indemnity, you can create a contractual obligation on the company to hold a certain level of D&O insurance based on the relevant risk, hold the insurance for a certain period of time, even after you have ceased being director, and have them pay for the insurance premium.
Directors have an extensive list of responsibilities and obligations they need to meet to ensure their company meets. If the company breaches any of these obligations, the director may be personally liable for any damage or fine that results. Every director should understand the duties that come with the role and the consequences of not meeting those duties. Some of the duties include: performing the role with care, diligence and skill, preventing insolvent trading, acting in the best interests of the company and good faith obligations, and maintaining proper records and financial reports. When engaging a lawyer, directors might need legal advice independent of any advice given to the company due to potential conflicts of interest.
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